How to price a product or service is a classic marketing challenge. But as with so much else in the cloud economy, businesses can be profoundly more flexible with price than they could in the past.
By that, I don’t just mean that cloud pricing is elastic (though it may well be) or that business models can adapt to changing needs more readily (though indeed they can, as any industry veteran who’s seen companies “pivot” can attest).
No, what I mean to say is that pricing, like every other customer interface, can be leveraged just like any other part of the growth hacker’s toolkit. For more traditionally-minded product managers, that might be surprising. Indeed, in many businesses pricing was a problem handled by someone else — marketing, finance, executive leadership — but not the boots on the ground product team.
Growth hacking is about experimentation, though. What’s one of the most powerful variables you’ve got on your lab bench to experiment with? Price.
How have other companies hacked price as a growth tool?
Don’t Assume Free (or Freemium) Is Better
It’s sometimes taken on faith today that software and cloud services must be free (or free-ish) to sustain any meaningful growth. But is that really true?
Of course you want to encourage installs and monetize your base version’s growth surfaces. But don’t assume free is the answer. Instead, test it.
A good case in point is what ProdPad, a developer of product management software, discovered. It initially offered users a 30-day free trial, but found most users had decided by Day 9 whether or not they’d buy, so it cut the free trial down to 14 days.
ProdPad's conversion rate doubled!
How does that make any sense, if you buy into the idea that freemium is the biggest possible worm to bait your hook?
ProdPad (who subsequently did a number of other smart, growth hack-y things with its trial offer) found that truly interested users were spurred to buy when there was a narrower trial window, and that a 30-day trial actually allowed too many distractions or second thoughts to creep in.
In the process, the ProdPad team learned critical insights about their pricing structure and user base they never would have gotten if they hadn’t experimented:
- The users you really want on board will pay for perceived value (and are more likely to be loyal and open to upselling)
- Giving it away for free can devalue a product’s user experience, and hurt long-term engagement
The lesson? The pull of “free” may not be as compelling as conventional wisdom assumes. Test and use data to make that decision — because your first assumption may be the wrong move to make.
Explore 'Fare' Pricing
One group of companies that’s been doing a version of flexible, experimentally-driven pricing for years is an industry not often credited with a whole lot of innovation: airlines. Although airlines offer plenty of abject lessons of how not to do business, their insight that pricing can be a powerful tool for optimizing demand and revenue is something from which growth marketers can learn.
Airlines call it “yield management.” For decades, they’ve used computational arrays that would put the NSA to shame to maximize the revenue on every flight by charging different prices for different passengers. Multiple fares may be available for any given flight, so they can accommodate business travelers who’ll be price-insensitive (to a degree) as well as the price-conscious travelers who’ll only book if the price is right.
But by limiting the number of seats available at a certain price on each flight, the airline can “close out” fares so additional passengers need to pay more. Their fare-setting platforms are making adjustments to those seat allotments and prices in real time, so they can optimize revenue from a flight that’s selling out, or offering more low fares to fill an empty Airbus.
There’s nothing set in stone or even particularly predictive about their fare model. They’re experimenting continuously to max out sales volume and margins.
Sure, yield management is in many ways predicated on the fact that airlines (and other business like hotels) have the very real issue of fixed inventory and costs to work with. That sort of constraint is a non-issue in the cloud.
Still, the lesson for growth hackers is about the value of empiricism: You should always test different pricing models against different audiences before you make decisions that may have long-term effects on brand perception and potential revenue.
Iterate, Iterate, Iterate
Here’s a stellar example of experimentation in action. Collaboration platform provider Front wanted to de-risk its SaaS pricing. Set it too high, and it would price itself out of the market; too low, and it would devalue the product and lose out on potential revenue.
As CEO Mathilde Collin explained in a very smart blog post, the company labored through multiple models before realizing what it had to do:
“Iterating on pricing more frequently would give us more data on what works and what doesn’t. So instead of changing prices once a year, we decided to get experimental.”
Front began to get experimental quickly and often, with new pricing iterations rolled out every three weeks and tested on small cohorts. By comparing the reactions to each iteration, Front keeps learning which pricing works best, evolving its pricing “little by little at a steady cadence” and deepening its knowledge of customers.
One of those insights? Enterprise clients really wanted to see hard pricing numbers on Front’s website, so Front obliged them.
The Takeaways … PricelessWhat do these examples teach us about applying growth hacking techniques in pursuit of the ever-elusive sweet spot for product pricing?
- Experimentation with pricing shouldn’t be considered separately from any other product testing. Frankly, it’s mandatory, and be prepared to have your assumptions contradicted
- Why? Because by experimenting with the price of your product, you’ll understand its value to users
- By understanding that perceived value, you’ll understand your growth potential
- Experimentation gives you deeper insights into your audience that go beyond just pricing.
(Editor's note: Hear more of Josh's tips on data-driven marketing at CMSWire's DX Summit, taking place Nov. 13 to Nov. 15 at the Radisson Blu Aqua in Chicago.)