Most of you reading will probably be familiar with the phrase “price discrimination“. It refers to the practice of charging different amounts to different people for the same product or service. Effectively, you are charged based on your ability to pay, not on what you receive in return.

We came across an interesting example of price discrimination recently when talking to some solicitors. They listed a set of criteria which they use as the basis of calculating what they charge their clients. These included:

• The value of the item / deal / property involved
• How important the matter is to the client
• The rarity of the questions raised

So, for instance, two people getting exactly the same advice about a property deal can be charged different amounts depending on the value of each of the deals, and a company can be charged more depending on “how important” a matter is to it, or how often the question comes up!

Is it any wonder the legal profession is under scrutiny for its pricing practices?

Not only does the product ooze quality, it was also created by long standing and respected members of the SEO community. In our world, where SEO has become such as distrusted and misunderstood profession, the importance of credibility cannot be overstated.

[Disclosure: We use SEOMOZ at WhatClinic.com, but have no further relationships with the company.]

Test 1 – Simplicity

SEOMOZ Pricing

At first glance the pricing looks pretty overwhelming. There are three plans that each have different volume limits for each of four different feature sets, and to make matters worse each feature set has its own incremental scale, each of which is independent of the overall pricing scale:

To a potential first time customer this makes the pricing seem complicated and confusing. To alleviate this SEOMOZ do an extremely good job of promoting the lowest price option and give reassurance that the first 30 day period is risk free.

Test 2 – Market Size

Pricing is definitely set high enough to make SEOMOZ commercially successful with any kind of reasonable market penetration.  If they have any kind of success getting customers onto higher price plans then I could see a tremendous amount of revenue being generated.

Normally I would think that a $99 per month entry was too high as it would exclude the bulk of the market. However, I feel that that this entry point is correct or near correct for SEOMOZ for two reasons.

1. Price sensitive customers can rationalize a $99 expense by treating the purchase as a single $99 purchase which they then unsubscribe from. I see a slight potential problem here in that the 30 day money back guarantee essentially allows this market segment to game the system and get value for nothing.
2. The market advantage SEOMOZ has is credibility, which would not be enhanced by low end pricing.

Test 3 – Comparable Pricing

Complete failure here. As a potential customer I have no idea if SEOMOZ is reasonably priced, there is simply no frame of reference. To make matters worse SEOMOZ price points are so distantly spaced that I can’t easily compare one price to another to determine the best one.  I would nearly always recommend having two price points relatively close to each other so that potential customers can directly and easily compare one to the other.

Test 4 – Adoption

The 30 day money back guarantee massively reduces the barrier to entry of the $99 per month price.  None-the-less I think I would prefer to see a massively crippled free version that I would use for lead generation.

For example I think a free plan that crawled just 25 pages and tracked 10 key phrases would be commercially useless but would still allow a potential customer who was wary of entering their credit card details to become comfortable with the product. In addition, amateurs would use it and talk about it which would increase overall market awareness.

Test 5 – Price Discrimination

SEOMOZ discriminate on volume not features. Essentially they’re saying “the more sites that you have & the bigger the sites the more you pay us”. This is a perfectly reasonable method of price discrimination, but I think that some feature discrimination could segment the market further and therefore improve revenues.

For example, I would suggest that the Q&A feature not be made available on the base plan.  This would then create strong pressure to upgrade during an SEO crisis period when the customer’s need of the product is at its highest and their price sensitivity is at its lowest.

SEOMOZ’s price discrimination is extremely aggressive. In fact I think it is far too aggressive. There is a massive difference between $100 a month and $500 a month. There have to be a large number of users on the $99 plan who would happily pay more, but won’t stretch to $500 per month.

Suggested New Pricing

The main point of this new pricing is the introduction of a new price point closer to the base plan. The base plan has also been reduced in functionality and number of campaigns. I believe that such a pricing structure wouldn’t hurt adoption while providing an attractive upgrade route for satisfied customers.

At this level of pricing I really don’t think that people are going to sign up for anything but the base plan so I think it’s okay that the PRO membership is still clearly the preferable option to start at.

SEOMOZ Pricing Analysis Score Card

Over the next few weeks I’m going to have a look at a few of them and attempt to dissect their pricing with a view to seeing if their pricing passes the following tests:

1. Simplicity
2. Market Size
3. Comparable Pricing
4. Adoption
5. Price Discrimination

A Quick Introduction To KISSmetrics

KISSmetrics is an analytics service that attempts to model a website’s most commercially important interaction with its users – the conversion funnel. Their market is anyone who runs a website commercially and who cares about the performance of their conversion funnel. Value is delivered by providing business intelligence that enables the website owner to intelligently change their interactions with their users, maximizing their revenue as a result.

KISSmetrics Pricing

Test 1 – Simplicity

KISSmetrics has beautifully simple pricing that poses no barrier to comprehension. I can immediately see what pricing plan suits me best.  It almost seems a shame for them to include standard features on this list (Unlimited Reports, A/B Testing, GA Integration) which interfere somewhat with the simplicity.

I have one minor problem with the simplicity of the pricing – what happens if I opt for the 1 million event plan and in one particular month I run 1.1 million events?  Are the last 100K events trashed? Are they stored and subsequently computed if I upgrade. Is a random 100K chunk lost?  In my opinion this needs to be clarified and simplified in the customers’ eyes on the pricing page. For example, change the Events per month values to “First 1 million events”, “First 5 million events” and “First 10 million events”.

Test 2 – Market Size

Pricing affects market size in a variety of different ways. Trivially, market size equals the number of customers multiplied by the average price, so the higher your price the bigger the market. However, higher prices can reduce customer numbers and you can end up excluding part of the market. However, conversely, you can increase your sales/marketing resources allowing you to capture more of the market.

In my view there is no question that KISSmetrics have set pricing high enough so that even if only a small percentage of the market adopts their service the company will be a success. The pricing should also provide KISSmetrics with sufficient resources to be able to go after more market share.

I only offer one proviso here: if KISSmetrics is not as well funded as it seems, then it would pay to offer a heavy discount for annual subscriptions, rather taking slightly more money in the long term delivered as smaller monthly amounts now. That way the money invested in sales can be immediately recycled.

Test 3 – Comparable Pricing

No one wants to pay too much for a product. If a potential customer feels a service may be priced too high many will delay or avoid the purchase. Unfortunately for KISSmetrics the product that is immediately comparable to the first time visitor’s eye is Google analytics, which is free. To make matters worse, KISSmetrics itself ensures that I make this comparison by including ‘Google Analytics integration’ on its pricing page.

In my view, if you cannot provide a favourable external comparison then your own pricing needs to be comparable. I should be able to compare one of your prices against another and get a level of comfort that the package I’m buying is priced competitively. For this to happen two price points need to be close together. KISSmetrics’ pricing fails here.

Test 4 – Adoption

I don’t care what planet you live on but $1,800 a year is a lot of money.  Having entry level pricing at this rate automatically excludes a huge portion of the market that would otherwise derive value from the product. Unless KISSmetrics has high costs associated with a sale (maybe support costs) I would be tempted to look at a lower entry price that was limited in such a way that it wouldn’t cannibalize my higher priced offerings.

KISSmetrics Potential Market Size

This way it would be easier for KISSmetrics to get much wider adoption, and if the pricing was designed correctly they could push customers up their price plans as they prove the value of their product.

Even if a small user with 100K events per month was willing to pay $1,800, the pricing is going to make them feel like an idiot. “Here am I paying for a million events when all I’m going to use is 100,000”. Pricing should make the customer feel like the smartest guy in the world.

Test 5 – Price Discrimination

The goal of price discrimination is to segment the market according to willingness to pay, with a goal of maximising revenue.  KISSmetrics discriminates on one axis only: volume. It’s even debatable if they use price discrimination at all – one bar of chocolate costs X, two bars cost 2X, etc.

Since the distribution of websites by their traffic is a classic power curve (as in the events graph above) the KISSmetrics pricing model will always result in the most customers being on the lowest price plan.

This means that the bulk of the market can only give KISSmetrics $149 a month. Customers with less than 1 million events still get access to all of the features so there is no reason why they would ever adopt a higher price plan. This doesn’t make much sense; it’s kind of like offering a student price for a haircut and then not allowing them to purchase an expensive and more profitable colouring.

What defines willingness to pay for KISSmetrics? This is always difficult to model and generally we have to accept an inaccurate model that works for the bulk of customers but fails for a minority (for example cheap OAP pints fail to account for the millionaire OAPs). For a KISSmetrics’ customer it would seem that the factors that matter are:

• Volume of events
• Dollar value of  the margin on the average event
• Perceived potential improvement that can be expected

The second two factors are difficult to model which is probably why KISSmetric’s have stayed away from pricing off of them. However, I would contend that there are several ideas that would we could look at to help define these factors, albeit inaccurately.

• Logins. The number of people who want access to the data. A company selling X units at a high price is typically going to have more people who want access to business intelligence than a second company selling the same volume at a lower price.
• Accounts reconciliation. Refunds and charge backs are likely to be a factor in higher ticket items.  Adding a feature that would allow for the service to be reconciled with month end accounts ensures that refund sales and charge backs are taken out of the analytics and that data is true and accurate. In addition, top-end products may result in the creation of a sales lead rather than an online purchase and being able to reconcile sales with the lead conversion funnel will be valuable.
• Traffic Spike Overruns. This feature would securely store events that overrun a plan and can subsequently be recovered by paying the transaction fee. The longer a site has been in existence the more iterations it will have been through and given that KISSmetrics is targeting metric driven companies the less perceived improvements there are likely to be. It seems likely that older sites have more predicable traffic with smaller spikes,  so pricing off of this may be able to segment the market (needs more research).

Suggested New Pricing

I’m not going to suggest that this is right; however it should show the rough direction that I would like to move the pricing towards.  Also please accept that I haven’t put in the kind of effort required to make the verbiage easily consumable – clearly a lot of work would be required to get this into any kind of finished form.

Proposed New KISSmetrics Pricing

* All accounts get free A/B testing and commoditized website analytics integration (including Google Analytics).

This gives me

1. A much more attractive market entry price that is sufficiently limited so that it shouldn’t cannibalize my higher priced plans
2. Pricing is comparable. Silver is obviously much better than Bronze for just 20% more
3. There is an attempt to segment the top end of the market and to price discriminate accordingly

What do you think of KISSmetrics pricing model? How would you change it to move the company forward? Share your thoughts in the comments.

Also feel free to suggest other web application pricing that I should look at

For a lot of companies, consumer software companies for example, running a trial is effectively without cost. You simply put your trial software up on a website for download and let whoever wants to trial it do so. However, for other companies, including us in RevaHealth.com, trials have a tremendous cost.

Running a trial here with a potential customer means we have to spend time setting them up and teaching them how to use the system. It also means that the trialling company may receive value that would otherwise flow to one of our existing paying customers. The trialling company is also monitored by an account executive on an ongoing basis. All of this means that running a trial from our perspective is an expensive proposition.

The whole purpose of a trial is for the potential customer to determine if the product or service can deliver value. This means the trial isn’t without cost to them either. They have to devote time and effort to evaluating the offering. If they take the trial and don’t spend any time working with it then the trial was obviously pointless in the first place.

So how can you ensure that the customer is going to give the trial the attention it deserves? You can’t really, but a good starting point is to charge for the trial, and here’s why.

What’s The Worst That Could Happen?

A decade ago I was working for Baltimore Technologies selling Public Key Infrastructure into tier-one banks all over the world. Our software was expensive and complex, costing millions of dollars. In the beginning we thought that simply trialling our software for free with one of the world’s leading financial institutions represented a great success. Later on we found that all our product was doing was sitting gathering dust without anyone actively evaluating it. Obviously the entire trial was pointless.

So we started to charge for trials, and as a result we did much fewer, but the trials that we did were always a success. (A successful trial doesn’t necessarily mean that you make the sale – a successful trial simply uncovers and clearly demonstrates the value your product offers to the customer.) Not only did this mean more sales in the long run but it also resulted in significantly reduced costs.

How Did Paid Trials Reduce Our Costs?

Charging for a trial is a nearly foolproof method of evaluating a customer. It tests their interest in the product, their ability to purchase at all, and demonstrates a commitment in a way that is close to impossible through any other means.

1. It forces your own sales staff to correctly evaluate the customer.
2. Even if a customer isn’t interested, sometimes the path of least resistance is to agree to a free trial. After all, it doesn’t cost them anything. Charging for the trial uncovers this.
3. Charging for the trial uncovers if the customer has any money to spend.
4. It also reveals whether or not the person you are talking to has the authority to sign off on a deal, and so helps to identify the key decision maker.
5. Finally, it helps to ensure that the customer will spend some time and effort making sure that the trial gets the attention it needs. After all, they probably have to justify paying for it in the first place.

At RevaHealth.com we never give free trials of our paid accounts. If someone wants to trial a particular account we will normally accommodate them, but they will always pay, normally for a quarter of a year at a pro rata cost. Ultimately, charging for trials reduces the amount of time we need to spend on customers who would never buy in the end.

Charging for trials isn’t going to work for everyone in every sector, but it does work for us. What are your experiences of offering your products or services on a trial basis?

If you’re free on Wednesday evening, drop in and say hi and add your 2 cent to the discussion.

What: Talking about pricing, drinking beer and wine.
Where: Oleysa’s Wine Bar, Exchequer Street, Dublin 2 [Google Map]
When: 6pm, Wednesday, June 24th.