While working on the business model for ShopWatchBuy.com, I’ve come up with a few thoughts and ideas about pricing models. Here are key criteria for pricing models:
- Profitability
- Simplicity
- Enticing
- Technology
1. Profitability. Many argue that FREE is the new pricing model for Web 2.0. I have my doubts. The old adage “there’s no such thing as a free lunch” is alive and well, and holds true for Web 1.0, 2.0, “Whatever.0″
Somehow, someplace, somewhere along the value train someone has to pay. Weather it’s bandwidth, storage, or development time, someone’s got to pay. It reminds me of the internet before the bubble – users where the new currency and eyeballs were more important than dollars. Well, we all know how that turned out.
Sure, you’ve got to have traffic, and if you do you can monetize it, but that doesn’t mean you’ll be profitable. I don’t know the exact numbers, but I think the dirty little secret of things like Google’s AdSense is that unless you have MASSIVE amount of traffic, you’ll get a little revenue that’s hard to calculate the real ROI on because of click leakage.
The other thing about Free is the cost incurred from abuse. YouTube illustrates my point above – lots of traffic, but no yet profitable – but I also wonder how much they spend deleting inappropriate videos?
2. Simplicity. Can your customer understand the pricing model? It seems today that so many companies such as Cable and Cell Phone providers operate under the “if you can’t convince ‘em confuse ‘em” model.
I consider myself a pretty smart guy, yet sometime my cell phone bill is beyond me 
What if cell phone companies worked the opposite? I tell you how much I’m willing to spend and you give you a way to manage that?
That’s why I love iTunes – $.99 for a song – pretty straightforward.
I’m not going to disclose it just yet, but this is what we’re hoping to achieve with the ShopWatchBuy pricing model. It’s definitely a difficult task though.
3. Enticing. This is another obvious one. You’ve got to have the ability to entice customers with an attractive entry level price point and then up-sell. Another great example of iTunes – $.99 is pretty enticing for a song I really love.
Where companies miss the mark on this is either A) the entry price is too high or B) the entry price is low, but has no real value. For a customer who is really evaluating a product or service, ethier one is an enticement killer.
Again, I’m not going to unveil it here, but I think we’ve come up with a great starting point for sellers who want to use videos to promote their products.
4. Technology. Okay let’s say you’ve got the simplest most enticing and profitable pricing model you can come up with. Can you actually implement it on-time and within budget? This is critical.
The Google AdWords pricing model has got to be one of the most brilliant of all times. But actually implementing it: PPC, Quality Score, Revenue Algorithms, etc… has got to take an incredible amount of development muscle.
You’ve also got to consider the technology and structure of your suppliers. Things such as bandwidth usage, storage and payment processing are examples. Storage and Bandwidth are usage based, payment processing is transaction based. Your pricing model has to account for these differences with enough of a contribution margin to cover both fixed and variable costs.
Overall it seems that pricing is both a Science (cost, margins, etc…) and an Art (marketing, pyscology, etc…). Hopefully this post gave a few things to think about for your next perplexing pricing problem!
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