The best pricing metrics are highly correlated with users value metrics.
A pricing metric is what do we charge for McDonald’s charges for hamburgers? That’s a simple pricing metric, PayPal charges a percentage of the revenue that we collect.
That’s a pricing metric. There are many different types of pricing metrics, especially in the world of SaaS. We have this ability to choose many, many different possible pricing metrics. We could choose the number of clicks we could choose. The number of leads we could choose, the amount of data that somebody downloads or the number of gigabytes.
“Choose a pricing metric that is highly correlated with a value metric.”
– Mark Stiving
Now, if you think about Netflix a long, long time ago when they first came out, they put Blockbuster out of business. Well, how did they do that? They did that by changing the pricing metric metric. Blockbuster was charging rentals of a movie by the night plus late fees. If you forgot to return it, Blockbuster changed the entire pricing model.
And instead of charging a rental per night, They charged a monthly subscription, which said how many DVDs you were allowed to have at your house at any one point in time. They just changed the pricing metric. And because people love that pricing metrics so much more than they loved paying late fees to blockbuster.
Netflix took off. What you want to do is think really hard about how is it that your customers perceive value. And then see if you can find a pricing metric, what is it that we’re going to charge for that is highly correlated with how your customers perceive that. PayPal is probably the most perfect example of this possible as a salesperson, as a selling company, I may X except revenue using PayPal.
So somebody pays me money using PayPal, and I love getting more money. The more money I make, this is just awesome. This makes me happy. Well, PayPal takes a small percentage of that. Well, I don’t like giving PayPal a small percentage of the money I make, but I like making money. I hope someday I pay PayPal a million dollars in a year because that meant I made $50 million.
If they’re taking 2%, you can see how their pricing metric is highly correlated with how I perceive value. That’s what you want to be thinking about your best pricing metrics are highly correlated with users, value metrics.
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