Innovative Pricing Models

February 27, 2008  

I was having a conversation the other day with the CEO of a small and growing company. We were talking about innovative pricing models that could help attract – and then lock in customers. Although there are many models out there, here are three I find particularly interesting.

The Consumable Model

With this model you give away (or sell at a reduced cost) a product that has a consumable portion to it. Give away the razor and people need to buy the blades. Get a cell phone, and you need to buy minutes. Buy a printer and you need to buy toner. The consumable portion can be sold on an as needed basis (the consumer needs to buy), as a subscription (you get a set amount each month – such as cell minutes), or as an automatic replenishment (use and we resupply). Staples recently introduced “Ink Drop,” a NetFlix style automatic replenishment for printer ink. Send in the empty cartridge and they will automatically send you a new one. I discussed this concept in my entry on analogy driven innovation.

The Substandard Model

With this model you sell a product or service at a significantly reduced cost, knowing that people will want to (or need to) upgrade at some point. I worked with a large computer manufacturer a number of years ago. Their top of the line product was out of the price range of many companies. So they offered a scaled down and slower version that was quite affordable. Here’s the interesting twist. The slower model was exactly the same computer as the top of the line model. All they did was add a chip to slow it down! They knew that many companies, once the computer was installed, would want the costly upgrade. To do so, they would simply remove the rogue chip.

The Freebie Model

This model is growing in popularity (I suspect it was originally invented by drug dealers looking to hook new addicts). Give a product/service away for nothing. Then, as they want more – or have increased needs – you start charging. This is particularly useful for web-based products where the cost of delivery is inexpensive bandwidth or software. Offer a base product for nothing. Although you may limit the number of users or the number of features, it is a fully functioning product. This is not a trial. Many website offer free versions of their base product, but charge a subscription for their “gold” level features. Adobe did a brilliant job of offering the Acrobat pdf reader for free. This created an industry standard…and helped sell their pdf creation software.

Are you looking to attract – and retain – new customers? If so, try these three models. With some creativity, I am confident that all of these models can be applied to your business.

What other innovative pricing models have you seen?

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