Five secrets to arrive at right price metric

In the late 90s, there was a curious phenomenon. Many well off people owned mobile phones, but they used it sparingly.

The main reason for this behaviour was that incoming calls were charged. Unless the call came from some known person, it simply was not picked up. It took a government notification to do away with the charging of the incoming calls. This event, in my view, singularly caused the telecom revolution in India that is for all of us to see.

Often companies imitate each other in deciding how to charge their customers. However, there are a few principles that should be kept in mind while designing a price metric.

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#1 Customer should care for it: When GE prices its aircraft engines, it bills by flying hours. From a customer perspective, that is when the plane is earning revenue. Similarly, the cloud computing companies charge by CPU hours. While there could be many ways to charge a service, the metric should be aligned to the most important aspect of value creation.

#2 Must be easy to understand: A CRM software for clinics was priced at Rs. 10,000 per year with additional fee for a host of other features. It was a hard sell until the company changed the priced to Rs. 2 per patient. Many companies create complex pricing units that depend on provisioning of resources and their usage. Such metrics are difficult to understand and administer. It is best to use a simple metric.

#3 Should encourage higher usage: Some eCommerce companies charge the shipment fee separately. The idea is that it will encourage the buyer to increase the number of items in her cart to optimise the cost of shipment per item. Similarly, some telecom companies charge per call rather than per minute, so that the users do not keep looking at  their watch.

#4 Must have factored the cost implication: A software priced by per user meets all the previous criteria. However, the cost will be too high for some users need disproportionately high amounts of computation. Similarly, a mobile phone plan that offers price per call would be unprofitable for users who make lengthy calls. Hence, one needs a cap on usage to deal with such exceptions.

#5 Test the metric before launch. Let us revisit the example of a mobile plan that charges per cal rather than per minute. Even if all the surveys point that the customers prefer this model, it is prudent to test market. Pay per call is directly in conflict with pay per use principle. Assuming that an average call is for 5 minutes, the some one making a call for 1 minute may feel uncomfortable paying for a higher call rate. All these issues would come to fore only while testing the price plan in the market.

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