The art and science of price optimization

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The art and science of price optimization
The art and science of price optimization

At an executive "lunch & learn" on April 28 in Burlington, Mass., speakers addressed concerns about pricing optimization that are top of mind today for many worried marketers, product managers, and customer-experience executives today.  The solution? Enhanced, multiple, recurring pricing models.

Getting pricing right is a challenge--particularly now that software, the cloud, the Internet of Things, and mobile devices are making new ways of doing business, new monetization schemes, and new abilities to concurrently focus on multiple core competencies, more accessible to market leaders and would-be market leaders: to the point that they are nigh mandatory. (If you can do it, your competitors can too.)

Co-presenters Brendan O'Brien, Co-Founder and Chief Evangelist of Aria Systems, and Omkar Munipalle, Director of Cloud Strategy and Business Development at Gemalto, highlighted the example of medical imaging machines manufactured and sold by Philips Healthcare being adapted to a pay-per-use model. Large urban medical centers, such as Boston's Massachusetts General Hospital, actually prefer to shell out a $15 million capital expenditure to outright own and freely operate their own imaging equipment, according to O'Brien, simply because they have the money, they have the customers, and they need the volume. 

Philips Healthcare's new subscription model for its imaging equipment, however, "opened up [the] small regional hospital market" to the company's marketing and sales teams, reported O'Brien, because those customers had previously been struggling to afford the CAPEX on imaging machines. What's more, neither market nor revenue model cannibalized the other because the demands of both markets were so different. Philips Healthcare's new model opened up new market segments and new business, period.

"It's just a choice," summed up O'Brien. "It's just two different prices."

Munipalle said that both vendor and clients co-benefit from the arrangement because Philips is able to adapt its pricing model such that those who used the machine more wound up paying less per use, in the long run. Munipalle calls these one-time charges "revenue moments," describing them as opportunities to keep things more affordable ("the more you use, the price comes down significantly," summarized Munipalle) yet profitable in the long run while improving the customer experience.

This all raises a question, however: How can a recurring-revenue company that charges per use or instantiates one-off charges here and there for individual transactions ensure sufficient functionality going forward for both the subscribing customer and the trial-period customer? Asking Munipalle and O'Brien about this, I wondered out loud at what point "two dollars here and three dollars there" in the customer experience becomes nickel-and-diming the customer such that they may be turned off of the product or service, absent a balance of functionality.

"It's less a matter of balance and more a matter of options," O'Brien told me, insisting that for many the model works, whereas marketers should offer customers with concerns like mine "bundle packages" as an alternative pricing model. "Let the market choose," O'Brien urged.

"Pricing is both an art and a science," chimed in Munipalle, quick to agree. "The art starts coming in when you have customers coming in at different price models." Munipalle echoed the importance of supporting multiple price models when other attendees voiced concerns about taking too many revenue hits by relying too heavily upon or shifting too quickly to a recurring-revenue model. The speakers did acknowledge that these concerns can be very real – but were quick to point out that the problem can be readily avoided.

"You don't have to [take a hit] if you have more than one model," said Munipalle. "I always advise my customers to have more than one model before they go to market."

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