Why the price model is driving your business
Taking a close look at articles around pricing models for startups, most authors are mixing up approaches for pricing (e.g. cost-plus pricing), business models (e.g. freemium) and real price models. While all of these are relevant to your monetization strategy, we will purely focus on price models here.
Price models determine the relationship of usage and price. Take your mobile phone plan for an example. Today’s common price models include pay per minute, fixed minute packages or a flat fee for unlimited calls.
Depending on your choice for a price model, you will directly impact usage patterns and thereby your customer growth. Offering flat fees will drive usage of individual users, but might hurt your user growth since the barriers of entrance are very high for customers on the lower usage end. Thereby choosing the wrong metric can hurt your overall business goals and in the worst case you restrict your business opportunities in the long term.
5 potential price models for StoryHome
As we already described in earlier articles, StoryHome’s product comprises of a hardware and a application component. Hardware pricing is typically not very flexible since sales channels such as retailers and e-commerce are expecting fixed retail price points – and there is not much to do about it if you want to use these channels. We will dig deeper into the correct price point for the hardware piece in one of our next posts and put our focus here on the mobile app pricing.
Looking into the price model for the mobile app, five price models come to mind:
|Price model||Explanation||Usage monetization||Example|
|Price per user/family member||Each mobile app user has to pay for using the app, either monthly, quarterly or annually. This correlates to a flat fee.||Spotify pricing of 9,99 EUR per month|
|Price per family||Each family has to pay one price for using the app across the family members.||Microsoft Office365 Home plan|
|Price per minute||Each user has to pay for the minutes they can access on the StoryHome server.||DropBox pricing, which is based on the GigaByte metric|
|Price per recording||Each user has to pay for the recordings they are uploading to the StoryHome server.||Music studios are driven by the value of the recorded end product.|
|Price per playback||Each user has to pay for the number of times they are playing back recordings from the server.||Spotify is granting kickbacks to musicians based on playbacks|
Looking into these price models, it becomes clear that only three of them are monetizing on usage, whereas two are pure flat fees. Each of them is having big implications on the system development, communication, tracking and most importantly on the success of the business.
A structured approach to finding the best model
Similar to our original approach for determining StoryHome’s value against competitive offerings, we were rating these five price models based on 10 factors, which have been:
|1||The revenue growth potential||How likely is it that the price model fosters revenue growth?|
|2||The margin growth potential||How likely is it that the price model fosters margin growth?|
|3||The active user growth potential||How likely is it that the price model is positively influencing the number of active users?|
|4||The usage growth potential||How likely is it that the model helps growing the overall system usage?|
|5||The simplicity for the user||How easy is it for customers to understand the price model?|
|6||The convenience for the user||Is it easy for a user to work with the price model in the long term?|
|7||The user’s ability to control his budget||How can a user fix his budget?|
|8||The potential of keeping a competitive edge||How much does the metric help to fence off competitive offerings?|
|9||The communication efforts to explain the price model||How complicated is it to tell the story of the price model to customers?|
|10||The ease of technical implementation||How hard is it to implement the price model with the product?|
A number of these 10 factors have been more important than others when rating the price models. Therefore we applied a weighting to each of them.
Exemplary we granted a higher importance to the potential of active user growth and actual usage growth compared to the potential revenue growth or the simplicity for customers, since these two are ultimately driving adoption and the growth of the StoryHome network.
A surprising result confirms DropBox model
In the next step we were scoring our five models on each of the 10 factors. The candidates came in the following order:
|1||Price per minute||Increases revenue, margin and customer growth||Limits the actual usage as well as the technical implementation|
|2||Price per user||Enhances the usage growth and very simple and convenient for users.||It will not perform as strong in the areas revenue, margin and active user growth.|
|3||Price per family||The strong suit lies within customer and usage growth potential .||Revenue and margin growth are limited and the technical implementation is very difficult.|
|4||Price per recording||Performs great on the usage and customer growth patterns since only the recording end is paying for the app usage.||Revenue and margin opportunities are very weak. It is not convenient to the customers.|
|5||Price per playback||Limits active user and usage growth potential as well as the revenue and margin growth opportunities. Technical implementation and convenience are also performing at the low end.|
Initially the team thought that a price model based on per user or family should be the way to go. The results surprisingly have shown that a price model based on the minutes a user can access on the server is reflecting the value the best way and will increase the active user growth as well as the revenue and margin opportunities at the high level.
This finding confirms Dropbox usage of Gigabytes as their primary metric. Customers understand that the value of cloud storage is determined by space on a server. The same is true for StoryHome. Customers will understand that the more minutes of stories they can access the higher the system value is for their family. In this case it is not important who is on the recording and playback end, since all family members should participate to the highest level possible.
In order to compensate for the lacking of a price model a product portfolio consisting of multiple offerings can be lined up. We will further shed light on this issue at the next time.