When we first set up RevaHealth.com our business model was very similar to Google AdWords. Clinics would effectively bid for position in our featured listings section according the treatments that they delivered and the market in which they operated. The model was very elegant for a number of reasons.
Firstly and most importantly it eliminated the need for us to price, and pricing is difficult. In fact pricing is incredibly difficult. This is because in order for the price you set to maximise your revenue it needs to reflect the value that the customer places on the product or service, and value is subjective. That means that the right price for one person is the wrong price for the next. (Take a read of Eoghan McCabe’s related post on the Contrast blog, You Are What You Charge.)
In our case we do business across 90 countries and about 1,000 treatments. Pricing across these 90,000 combinations would be impossible. So the second reason we liked the auction model was that in a liquid market auctions discover the value for you. They don’t discover the value to the highest bidder but they do uncover the value to the second highest bidder (unfairly referred to as the loser). Pricing never uncovers this.
Thirdly, the auction model eliminated the risk of over pricing and excluding potential customers. This is always the worry of normal pricing, however with auctions it is the customer that sets the price, making over-pricing impossible. The customer can still feel that the price they’re paying is expensive, but they come up with the price and they choose to pay it.
So Why Didn’t Auctions Work For Us?
OK, so in a way the auction model kind of worked for us, but as hard as we tried we simply couldn’t get it to scale. There were four problems:
- Auctions require a liquid market. Put simply an auction with one bidder achieves nothing. When we started RevaHealth.com we were effectively dealing in a number of niche markets in the medical tourism field, and there wasn’t the required demand or liquidity in each market to ignite its own auction.
- Auctions require the bidders to be actively involved in the auction. Our customers simply didn’t want to be that heavily involved, they would rather have paid a fixed fee without the complexity of bidding. In fact, the only time our customers did change their bids was when we picked up the phone and told them they should.
- Auctions required educated bidders. Our customers at the time weren’t sophisticated marketers. They didn’t keep accurate and diligent marketing records and work out their ROIs. They spent their nights poring over medical records not marketing data. As a result they weren’t really sure what the value of our product was and therefore were uncertain about what they should bid.
- Finally the most important factor for why the auction model wasn’t the runaway success that we had envisioned was that our customers weren’t used to doing business that way.
What We Changed
We needed to find a way to sell to the people who didn’t “get” the auction model for one reason or another, i.e. the majority of our potential customers! We introduced featured listings with fixed annual pricing at four different price points. This was an immediate success and required a substantially shorter sales cycle as the product is already well understood by the customer base.
There were a lot of disadvantages to doing this, particularly for our customers. In an auction model, the risk they took on was linked directly to the value they received, i.e. they received leads or enquiries at a cost that they determined themselves. By paying a fixed annual fee irrespective of the number of enquiries generated, the link between the risk and the value was broken. However, the fact that the annual fee product was easy to understand and sell outweighed all of the disadvantages, for us at least. We still maintain the auction model as a premium feature on top of our featured listings for the customers that can see the value in it.
Could the auction model be applicable to your market? Have you tried it already? Let us know what the key determining factors in setting your prices are in the comments below.
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