When Discounting Makes Sense
I took the Price class with you in early 2016 and absolutely loved it. I apply what I learned from you about value to everything I do professionally and as a consumer. Being in product management for only a short time, I never grasped the power of pricing; it is now my favorite part of product management.
I have a problem on pricing within my company that I have not been able to solve, and I hope you can offer a suggestion. We sell a monthly, subscription-based product. We discount heavily, do not provide packages and do volume discounts.
After taking Price, I knew packaging was our answer to effectively end discounting and increase profitability. But here is where it gets tricky: We sell the same product to two very different market segments.
The buyer in segment one views us as a will I product, with little price sensitivity. This segment uses the least amount of product features and may only buy one license. They may also sign deals as long as five or six years.
The buyer in segment two views us as a which one product, and is price sensitive. This segment uses most of the features and could buy hundreds of licenses. They may sign a deal ranging from just one to three years.
Segment one might be a single building down the street buying our product. Segment two might be an entire enterprise, encompassing the building down the street that we sold to in segment one.
Given the customer paying more is smaller and does less with the product, any thoughts on how we could make packaging work? I thought about making this two separate products, instead of one, but given that the segments overlap in the buying process, this could become messy. The segment two buyer paying much less for a license could see that a smaller location of theirs is already our customer, paying twice the price a month for a license. We’d have to honor that lower price or risk losing a larger deal.
Any information you can provide would be greatly appreciated.
I’m glad you enjoyed the class and it sounds like you absorbed and use a lot of the content. Excellent!
One suggestion is to have a steep volume discount curve. One or two units license for a high price. Three or more come down by 25 percent. By the time you get to 10, there is a 50 percent discount. You should be able to play with these numbers so they make sense for your market, but the point is that the will I customers who only license one unit will pay a much higher price. If for some reason these buyers get rolled into a larger deal, then they will get the lower price because they are part of the higher volume.
An alternative approach is to create different products for your single-license user. The best way to do this is find some feature or capability the will I customer needs that the others don’t. Maybe it’s simplicity. Then make sure that feature is not offered in the multi-license product.
Another method, but not my favorite, would be to make the multi-license management require two or more licenses to work. Then you could have two separate products.
A third approach is essentially what you are already doing. You said, “We discount heavily.” Sometimes this is good. If you have a high list price and don’t discount to the single-license buyers but discount deeply to the multiple license buyers, you are already implementing price segmentation. The goal is to determine the which one deals so that they are the only ones getting discounts.
I hope this helps.
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