Pricing Is A Tricky Thing

6a00d8341c03bb53ef014e606f4675970c-800wiI was recently asked my thoughts on how to approach pricing digital products aimed at the local Small and Medium Business.

Actually, the exact question was:

Basically, I’m looking at how new startups decide on a pricing structure when they’re selling to SMBs. Essentially, you’ve got your product/platform/system, and you’ve pinpointed your target customers—now how do you determine how much to charge? Obviously market research is important, but what specific recommendations do you have in terms of how to pinpoint the right pricing for a new digital marketing/hyperlocal platform? 

My answer:

Pricing is a tricky thing.  Price too high and you put yourself out of business because no customers will pay that high of price for your product.  Price too low, and you run the risk of giving away too much for free and struggle to keep the doors open – again possibly going out of business. Digital or not, a startup needs to be able balance the need to generate revenue with the opportunity to attract as many customers as possible.

I think it comes down to doing a few key things really early on.  First, study the current market to determine who is offering what and at what price points.  You should be able to look at the market and see the high end/low end products and their associated prices.  You then look for the holes in the market – where’s the point where customers are paying too much for not enough value?  That’s where you can bring something highly valuable to the table at a more affordable price and undercut the market.

Second, it’s really important to determine what problems you are solving and what value you are actually providing.  If it’s just the same as others on the market then it will become a price war with competitors – which you probably don’t want since it usually is a race to zero.  Ask yourself how can you do something new and innovative that hasn’t been done before, and then you’ll have more freedom on the pricing structure.  McLean Reiter, CEO of hyperlocal startup Knotis, echo’s my thoughts.  He says “Most SMBs have less than $1,000 to spend on marketing, annually, so it needs to be affordable and if possible, monthly, to help them manage their cash flow better. So It all comes back to value – what do they get in exchange for what they are paying for. You need to price yourself according to the market and your overall objective, while also maintaining profitability.

Lastly, it’s truly impossible to determine your exact prices before you go to market and interact with customers.  Smart entrepreneurs engage with their customers early on, ask them about price points and adjust/iterate as they continue forward.  Founders should also use these customer interactions to uncover the hidden needs of customers, which becomes the real value of your product and thus helping to determine a pricing model.  People pay higher prices for things they really need and can’t get elsewhere.  And ultimately, companies should A/B test certain price points (offer variable pricing to random customers through marketing and study the results) to see which convert better and then optimize from there.  

 Pricing can be tricky.  So agree to understand you will not know what your pricing will be out of the gate, you will only learn what it should be over time.

Hey Uber, I Like Your Ride… But Not Sure It’s Worth The $143 You Charged Me

I was charged $143 for a 5 mile Uber ride New Years Night and I am understandably not happy about it.

I like Uber, have been a fan for quite some time, a frequent rider and a brand advocate.  I am one of those people who pulls out my iPhone to show my  (low tech) friends a totally cool and new way to get a ride somewhere.

But maybe not so much anymore.

I feel like Uber was deceitful and lacked transparency on this decision.  Also, I think they did it on purpose to take advantage of their riders.  Uber made a recent business change they call “surge pricing” which is meant to be put in place on nights where demand greatly outpaces supply.  In basic terms, the more cars being hailed at a certain time leaves less cars left to pick up others.

So what to do?  Uber thinks the best decision is to jack up prices.  They call this a surcharge.  This is the email receipt I received afterwards.

When I hear the words surcharge, I think of a $10 fee or possibly something to that extend.  Uber thinks a surcharge is X times the ride amount is the appropriate way go.  Although they are stating they placed notifications and alerts at the point of opening the app and standing behind their decision,  I think it’s bullshit and here’s why.

I knew Uber would be more expensive New Years night.  They sent an email on the 28th, stating they proposed New Years change…. but conveniently  forgot to mention how much they would be increasing the rates.  My feeling is they did this on purpose, knowing if riders preemptively knew they would be charged up to 5X the normal rates they wouldn’t have even considered Uber.

Heres the email content:

We’ve only been in the Emerald City for a few short months but we’re already getting your patterns down. Whether you’re headed to the latest craft cocktail bar or going back to a well loved dive, you’re zipping around in Ubers like you own this city. Now that the mother of all party nights is upon us we know you’ll have a few glasses (read: bottles) of bubbly, and the last thing you want to do is call AAA for that tow-of-shame. We’re ramping up like crazy with the sole intent of providing a safe, convenient and stylish ride for as many Seattleites as possible on New Year’s Eve.

New Year’s Eve is what we call a *surge event* at Uber. This means we expect to see a massive demand spike and a supply shortage at the same time. During these events like NYE or Halloween there is a run on private cars in most cities and in order to ensure there are enough cars on the system (read: aka an Uber experience), we’ll be enabling surge pricing on New Year’s in a similar fashion to Halloween 2011. This means that rates on New Year’s Eve will likely increase during peak times of demand BUT when demand subsides or more supply becomes available, rates will automatically drop and you will ALWAYS know if there is a price increase before you request an Uber.

Champagne wishes and Uber dreams,

As you can read, how this was to be executed and the result on me, as the rider, is not mentioned.  All that was noted was that there was a possibility of an increase in rates based on increase in demand.  This is not transparency. Yes, they were on the right track about notifying riders and Uber followers about the change, but the particular way they calculated and executed this was totally wrong.

Uber has stated they used a dynamic pricing structure which may have been changing by the minute.  How the hell do riders know whether it’s going to be the same price or 5X the normal rates?  This is exactly why Taxi rates are controlled so closely, so no one gets out of control and starts jacking riders without their knowledge.  If Uber is going to cross the chasm to mainstream America they need to clean up this messy execution.

I could go on and on… but I won’t. I know I am not the only one pissed on this matter.  My point is transparency is not just a vague email or a short notification at a point in time where the rider has little other choices at hand.