RECONSIDERING REVENUE AND PRICING MODELS

RECONSIDERING REVENUE AND PRICING MODELS

September 2, 2019

Economists and business pundits around the world all believe in this one thing: Businesses exist to create value. Customers expect good value in return for the price they pay for a good or service, and businesses, in turn, expect to gain value in terms of profits by undertaking their venture. As a result, price becomes a centerpiece; a cutoff point for consumers considering parting ways with their hard-earned money or for businesses undertaking labor, skills, and creativity.
Designing a pricing or revenue model for your company is thus important for the survival of your business. In today’s age, technology has impacted many facets of doing business, and updating the pricing model to address these changes can result in adding more numbers to your revenue figure.

 

TIMES THEY ARE CHANGING
Technology has created a lot of disruption in the world of business and has resulted in the development of business models previously thought impossible. Facebook, a free to use service is worth over $100 Billion. Online retailing has evolved in the last decade and makes up a significant portion of sales in the developed world. The developing world is also catching up. The largest retailer in the world and one of the largest companies in the world by value is Amazon. Cable TV subscriptions and cinema halls are being increasingly replaced by internet TV provider, Netflix. Apple’s second-largest revenue stream after the iPhone comes from its online services division and it is expected to grow at a significant pace.
While looking at these tech companies, it becomes increasingly apparent that their revenue generation models and pricing policies do not follow the traditional methods.

 

TRANSACTIONAL VS RECURRING
Recurring revenue models have replaced transactional revenue models. Businesses typically relied on transactions that favored a one-time nature where the business developed and exchanged a good for money. However, things have slowly shifted towards a recurring revenue model where the value transaction relationship lasts beyond the initial transaction. This allows businesses to charge less initially and build a relationship that lasts longer and pays more.
Apple has built an entire ecosystem for its customers, and when customers purchase a computer or smartphone from Apple, they are integrated into the ecosystem. Before Jobs’ rejoined Apple, they only sold products in a “one-time” transactional affair and the idea of an ecosystem was still in its infancy. Fast forward to today, they have moved on to a recurring revenue approach by including options to expand customer’s experience via iTunes subscriptions, Appstore, Apple Pay and more. Needless to say, the transition worked.

 

PRICING TRENDS
As revenue models for companies have changed, their pricing strategies have also changed, especially amongst tech companies. Tech companies today are arming themselves with these pricing strategies in order to gain greater value.

Freemium. Facebook’s successful freemium model proved to the world how such strategies can pay huge dividends. By turning user’s data into value and utilizing the advertising platforms, Facebook has amassed billions of dollars worth of assets.

Bundle-pricing. These strategies are heavily used by Amazon and other e-commerce sites in order to drive up sales. Due to the greater power of consumers thanks to competition, Amazon’s bundle pricing pays off as customers opt for the lucrative deals and end up purchasing more than they had originally intended.

Subscription. The subscription economy is evolving at a remarkable pace and companies are making plans for this in order to prepare their company for the future. Volvo has already launched a vehicle subscription plan for one of its models where they advertised the car with the words, “Don’t Buy This Car.” The success of Netflix, Amazon Prime, Apple Services is proof of the promise that this pricing strategy holds. Microsoft and other renowned names in the software industry are all moving to a Software-as-a-Service (SaaS) model, a type of recurring revenue model dominated by subscription.

Pay-per-Use. Technology has evolved to the point where highly detailed reports and inferences can be developed very quickly. Utilizing technology, digital pay-per-use systems can be utilized. Many companies are already implementing this strategy with the help of sensors and data loggers. Rolls Royce has developed their profitable pay-per-use program where customers pay for the amount of time that the aircrafts are functional. This ensures good aftersales service and greater transparency and value on the customer’s end – a win-win situation.

 

QUESTIONS TO KEEP IN MIND
In a piece published online on Harvard Business Review, authors, Nicolaj Siggelkow and Christian Terwiesch discussed the connected strategy revenue model.
This strategy imbues businesses to focus all business functions in a synergistic way to provide continuous and pleasant engagement with customers. They suggested that by asking five questions, a proper revenue model can be developed. The five questions that they posed where they believed lay the opportunity for change: What is paid for? When is the payment made? Who is paying? Why does the customer pay? What currency is the customer using?

By considering these questions and answering them, a connected strategy revenue model can be developed. Thanks to technology, there are many options available such as pay-for-performance, pay-as-you-go, paying with data, etc. These options provide greater value for brands and require brands to consider the ecosystem that they exist in.

 

THE FINAL PRICE TAG
What you ultimately decide to incorporate as your revenue model and pricing policies all depend on what kind of business you are in the first place. If a certain strategy does not bode well with the business model, you will either have to change your business model or change your pricing strategy. If your company specialized in unique luxury items, the concepts of freemiums or subscriptions would be out of the question as users would want to feel a sense of ownership and superior quality.
As a result, care should be taken when you plan to update your revenue and pricing models with the help of technology.

 

By Khondker Faraz Shafiq

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