Sometimes having simple pricing for your product makes your life more complicated than it has to be. You find yourself in a situation, where many customers pay too much for using your product too little, and other customers pay too little as they use your product more, than you had envisioned.
If you are not careful, you end up in a situation, where your heavy users are costing you a lot of money, while the casual users, you’re making money on are always at risk of churning due to a poor match between value creation for them, the price they pay. Needless to say that is not sustainable, and it provides a level of risk to your business that is wholly unnecessary.
The good question of course is: What do you do about it? The obvious answer? You fix your pricing and make it more ‘sticky’.
Based on what we implemented at Cortrium, while I was interim COO there, let me offer a suggestion: You bet on usage based pricing.
What is usage based pricing? Well, in essence it is a pricing model, where you provide all customers with access to your full product, but you charge based on usage. You introduce tiers of pricing based on the usage patterns you see from existing customers and make an effort to introduce a number of tiers that fit the best with how much, large groups of your customers are actually using your product, and the value they’re getting from it.
By doing this, you can in essence accomplish two important objectives:
First of all, you can make your product cheaper to use for those casual users, who don’t use it very often. You reduce prices for them and move them from unlimited usage to a capped usage that fits with just how casual they use your product.
It of course has a negative impact on your margin, but at the same time it significantly reduces the risk of churn and as such net-net over the longer term it provides for a much better and more profitable base layer for your business.
Second, you make sure that heavy users pay more, and that what they pay are at a very minimum aligned with how much it costs you to provide your product, and the service that comes with it.
While doing so you do the calculations and make sure that on a per usage basis it still makes financial sense for them given the business environment, they are operating in, and you of course also make sure that there is a small discount associated with heavy use, so customers feel that they get something in return for being more committed to the product.
If you at the same time make sure that all your calculations and tiers are rooted in a deep understanding of the market, you’re serving, how competitors price their products and what the value, you bring is, chances are that customers will readily accept your shift in pricing model. Fears of retribution, heavily increasing churn etc will prove to be wildly overblown. But you will be in a much stronger position after having made the move.
Therefore, my best advice to you is to look at your current pricing. Fix it ASAP if it is broken and get it to become ‘sticky’. There is no reason to live with the risks of high margin casual users churning and losing money on heavy users. Especially in the current economic climate.