Sunday, December 13, 2009

Pricing your Products

I keep hearing people talk about pricing models are very complex and they are always hard to come up with. I think most confuse over bundling options over pricing models. In fact the pricing models are by far the simplest and quite well defined. There are three standard models.

  1. Cost based pricing - Before pricing the product make sure your costs of manufacturing the product along with a notional economic profit is covered. Pricing below the cost + economic profits may be situational in a promotion for some but it's not sustainable and hence will get back to you in the long run. While doing cost calculations make sure to account for fixed costs and allocated overheads. In some industries where there is no competitions like state sponsored monopolies like utilities this may be the only means of coming to a negotiated pricing with the state.
  2. Competition based pricing - Unless there is significant different in the cost structure or product differentiation try to be as close to the competition as possible. Most people may think I have to be pricing below the competition always. This is probably the biggest mistake to do. Define competition and your strategic role in the market. A cost strategy or a differentiation strategy will decide what your target market is going to be and how your product should be priced in that. Your company size may not permit you to go on high volume low cost strategy as your support department cannot scale for your sudden volume growth.
  3. Value based Pricing - Ultimately, beauty is in the eyes of the beholder and hence your product price is purely how your customer sees it to be benefiting him and thus pay you accordingly as per his limits. Pricing for value is the hardest. The biggest problems are no one really knows how the customer is going to use the product in her environment. Ideal will be to analyze the customer benefit and charge her for a percentage of the gains as a price. But in steep competition this may not always work as competitor may quote a price so low that you may lose the account in trying to gain the maximum from the customer.
So my initial comments are all wrong. Pricing is all very complex. Actually not. Pricing is easy in principle. What is hard is assessing the customer, internal assessment of costs and competition's game plan. As long as you know how you can control the quality of the data input the garbage in and garbage out can be well managed. It's your company's market intelligence and strong accounting system that's key to creating great pricing decisions.

Innovative Pricing

The other day, I was reading an article in a newspaper which has stated the per second pricing by the telecom companies a real price innovation. Most people will admit or get carried away with such a statement. Of course it's a great innovation but for whom is the real question. Is it so innovative that the technologies associated to bill on per second pulse can make your bills lighter? Actually, not. It's the telecom companies who will eventually make sure they do a price modeling in such a way that there is absolutely no impact on revenue yet include a billing model that looks appealing to the consumer. This is like the old times where you had skewed plans like talk more plans or listen more plans. Eventually, however a combination you choose invariably your bills would be around the same. Every user in some ways has a notional ARPU in mind. And as it comes closer to that number we make sure our bills are within that range.

Getting back to the per second billing, why will we not see much of a difference in the per second billing for most customers. After the call rates have come down drastically most people speak in multiple of minutes. So if per second pulse is introduced statistically you will on average save about 30 seconds per call. If your calls are of 10 mins range approximately, then you save just 5% in the call time. If your calls are mostly 2-3 minutes then also your savings are within 20% of the call time. And if you are charged 20% higher for per second billing (50p / min or 1p / sec) then you actually need to make sure your calls are less than 2 mins to be able to get maximum benefit or else you will land up paying more for your calls.

The final question who is on the receiving side of the innovation as usual the customer. But there is still a gain. There are a class of people in the low-mid income group who use their cell phones to track business. Like say a taxi driver. Now he can make a call to the customer to update his availability rather than giving a missed call. Such announcements are going to be sub-minute calls and they will not mind making the actual calls rather than waiting on a missed call. After all whenever there is a new technology there are some sections who will get benefited. And it's good if it gets to the bottom of the pyramid. But may be some of that may not really make it down to the bottom if the rentals are kept different for per min vs. per sec call rate plans.

Sunday, December 06, 2009

Why do we innovate?

I keep hearing this from management of every organization I work for, we need to file more patents. We need to be more innovative. I never understand somehow why a small set of people end up filing patents while most do not. I also hear another set of people complaining that some people spend enormous time and energy in filing patents rather than spending time in their day to day activity.

Fortunately or unfortunately as the case may be I had been bitten by the patent bug 5 times. I filed 5 patents with USPTO from 2003. And most of them were by chance than choice. Many a times I have been asked by people to suggest how to be innovative. Luckily, I have been able to defend myself without having to reply to such requests nor actually talking about it. But, I feel sometimes myself what has made me innovate if I ever did it. Here are some of my thoughts. Feel free to question them or disagree with most of them, after all these are just what I feel.

  1. Necessity is the mother of all inventions - I filed couple of patents because there were no better way to solve the problem. Either I innovate or find something new and different or perish in front of an ever demanding boss who felt I was at my wits end in solving the problem. And you end up coming up something which looks cool and different but I am not sure how I am going to consume it. It just looks like magic.
  2. Being rigid in doing something someway - I filed a patent because I felt the way to do something in the way I think and not the shortcuts (may be long cuts) the world is doing today. This is my way of doing and I think that's unique and hence it's a patentable idea. It works I feel.
  3. I am too lazy - I believe a safety pin was invented when a husband got frustrated with his wife's ever demanding needs of broken buttons and devised a contraption by twisting a wire lying around. In some sense, people who innovate are lazy. They love what they want to do in life than reading to 10000 lines of additional code someone else has written than to replace with their 100 lines of alternate code. After all who does not enjoy spending the evening with a beer mug in a bar than in front of a computer monitor.
  4. What is innovation? I think the best answer to this question is given by Philip Kotler and Fernando Trias de Bes in their book Lateral Marketing.
In short we innovate because it's different and mostly even if it's not known why is it different.