Business Models & Pricing Strategies
Sunday, 5:30 PM GMT. A time Knowledge Officer learners probably know very well by now. It is the time we usually start our online sessions of the Product Management Pro Program. Since its first cohort, the Pro program designers made sure that having online and remote sessions should be one of its integral components. As much as we believe in the power of online learning, we also trust that human interaction is indispensable. Therefore, having speakers from different companies around the world, enriching our learners with their years and years of expertise, case studies and examples from actual incidents and scenarios they have been through, is one of our solid pillars of the PM program.
As a Career Accelerator Advisor at Knowledge Officer, grants me a great opportunity to be part of those online sessions! I forget all those tasks in my check-list, all those pending requests, unanswered emails and I wear the student’s hat. Being an eager learner by nature makes me curious to know more about everything and what a great chance to listen and learn from people working in some of the companies I have always looked up to.
Business Models and Pricing. Two gigantic topics in the business world. They were the headline for this week’s session. Although I usually take down a few notes or important points from each session, this time I found out there are so many interesting ideas that can go beyond the scope of “key learnings”. Accordingly, I came to the decision of summing up the session with the aim of sharing some knowledge.
Fabian Flatz was the speaker of this session. He is the Head of Operations at Fundstack. He also co-founded a payment startup called Telleroo and was a product manager at a number of companies
The session covered the following topics:
- Important business-related terms & acronyms
- Pricing for products and its relation with supply & demand.
- Sofware pricing strategies.
- Flexibility in changing the prices of software.
- Five ways to build a $100M business.
- Tiered pricing.
- Business model definition and examples.
- Business Model Canvas and examples.
One of the key concepts in the world of business is “pricing”. There is a direct relation between pricing a product and its supply & demand. The cheaper the product is, the more people want it. On the other side, the more money people can make, the more likely they are to spend on buying products or services.
When it comes to software companies, pricing is different. In the beginning, while you are still developing the software, your product, the cost is high because you are not gaining any money. It may also take a long time to be done from it. At this stage, it is difficult to set a price for the product since you are spending a lot and the product is not completely developed. Over time, the cost to produce additional units of the product starts decreasing until it approaches zero.
Startups working in software development always tend to set a low price for their product to be able to compete with their rivals and attract more customers. The good thing about software pricing is that you can easily change it after some time, which could be more challenging if you are selling a physical product. If your product is a software, use this flexibility to regularly check your pricing. Choosing a price and never changing it (either lower or higher) is usually a wrong decision.
Telleroo: A Case Study
Telleroo is a fintech product that helps accountants manage payments for their business clients. The founders of Telleroo came to the resolution that pricing should come after reaching product-market fit and this is always the case when you start something from scratch. Once you have a full understanding of your value proposition, not just assumptions, you can think more wisely about the price of your product. That was their approach.
Tellero’s Original Pricing Strategy
The first pricing strategy they used with Telleroo was as follows:
- 60 days free trial (They were mainly afraid of not getting any customers that’s why the had this very long trial period)
- £0.30/ transfer
- No other fees at all
The problems with the original pricing:
- Serving small clients was too expensive
- Overall profit was low since Telleroo had to pay their payments partner for every transaction
- Telleroo charged the Accountant who wasn’t used to being charged per transaction
Lesson learned: When u start out in B2B, pricing is not very important. It gets important as you grow. Once you have a stable business model & a stable set of customers, you can then customize your pricing strategy based on that. This happens when you are able to define a need that is monetizable. Therefore, optimization is the key to finding the right pricing for your product.
The New Pricing Strategy
The adjusted pricing strategy included:
- A subscription-based model
- The single business package is £39/ month (regardless if they made many payments or few payments)
- There are other packages (for less price) for a larger number of businesses
The benefits of the new strategy:
- A steady flow of income from the monthly fee
- The income goes directly to the bottom line (in comparison with transaction fees where they had to pay their own supplier for each transaction)
- Accountants only pay a subscription fee which is something they are used to.
Key learning: Pricing is not just a number, but it’s more about the value you provide to customers. You have to think about the whole framework and clearly identify your value proposition
Five Ways to Build a $100 Million Business
This is a famous graph by Christoph Janz discussing different ways that could make you build a $100 million business in terms of pricing. He made an analogy between the size of the company and a certain animal.
Here are the five different approaches:
- Elephants model: 1,000 enterprise customers paying $100k+ per year each
- Deers model: 10,000 medium-sized companies paying $10k+ per year
- Rabbits model: 100,000 small businesses paying you $1k+ per year each
- Mice model: 1 million consumers paying $100+ per year each
- Flies model: 10 million active consumers who you monetize at $10+ per year
What is worth mentioning about this strategy is that you don’t have to limit yourself to one animal. However, you can try multiple elements in parallel in order to target different market segments.
This can simply be implemented by having different pricing packages for your product; like basic, plus, pro & enterprise. Each of these plans targets a different market segment and makes your product accessible to larger tiers of customers.
What Is a Business Model?
“A business model defines how the enterprise creates and delivers value to the customers, and then converts payments received to profits”
~ Teece, 2010
So, a Business Model is like the answer to the questions like:
- How are we satisfying the needs of the customer?
- How does the company generate revenue?
For instance, the business model of iTunes is almost the same as Gillette razor blades since both of them require customers to make a one-time price, often at a loss, in order to frequently purchase the consumable “units” over time. Therefore, the actual revenue for the business comes from those recurring purchases.
Business Model Canvas
The business model canvas is one of the most famous ways to define a business model. It consists of several components that altogether help you look at the business holistically and from all sides to be able to set the business model.
The canvas helps you build a mental model through which you can make better decisions when trying to define your business model.
Here is an example of a business model canvas of Apple and iTunes filled out:
As you can notice, the different channels, in this case, are: retail stores, Apple stores, Apple.com & iTunes Store. As for the Revenue Streams, they are mainly from large hardware revenues and some music revenues. The value proposition is: offering a seamless music experience.
The session covered a few more examples of business models and business model canvas but I tried here through this article to shed the light on what has been covered in a nutshell.
Pricing strategies differ from one business to another and you probably have to do a series of trials and errors until you reach the right pricing strategy based on your value proposition. Flexibility and adaptability are very important to quickly change your pricing strategy when an old one is not working as it should.
As for business models, they are the driving factor of how your business is going to make money. Hence, you need to understand what your competitors are doing and use the help of some tools like a business model canvas to think in a practical way about the different elements that aid you to come up with the right business model for your business.
If you are looking for more of these quick learning shots, make sure to regularly check our blog: https://blog.knowledgeofficer.com/. We also post Key Learning points after each online session on our Facebook page: https://www.facebook.com/knowledgeofficer/.