The science behind mobile pricing and monetization
Principles of pricing
Even though pricing is so essential to make a company profitable and drive revenue, it’s a marketing element often overlooked by companies mostly because they think that is something they have no control over, the market is going to define it, or that the competition has already set the price.
Part of the marketing efforts should be directed at designing a pricing strategy that simultaneously creates the consumer’s incentive to buy the product and the firm’s incentive to sell the product.
Tools to help you define a pricing strategy: Value, structure, CLV, price sensitivity, and business’s goals
Value and pricing
The more unique your product is, the less important the price becomes. However, the more your product is seen as a commodity, the more the price becomes the only factor consumers are going to use to choose your product over the one from your competitors.
As an example, think about the first computers or the first smartphones that Apple sold. The product was so unique, never seen before, that price was not important especially among the early adopters. And over the years, Apple has been able to maintain a higher price because it has never been perceived as just a commodity.
For every product you are going to deliver to the market, there’s a ceiling and a floor. The floor is the cheapest price you could sell your product and still make a profit. However, as we have seen in the mobile world, sometimes you can go below the floor pricing and offer your product for free because you have another monetization strategy in place.
At the top, we have the ceiling. The ceiling is set by the perceived value that is usually set by the marketing efforts of the company or the price of substitutes.
At the very top, there’s what is called “objective value” (true economic value): this is potentially the real value the product has to offer. When a perceived value has been defined, it’s very hard to go all the way to the objective value.
At the end of the day, you are looking for that price point that gives the consumer an incentive to purchase it and the company an incentive to sell it.
- Consumer’s Incentive to Purchase = [Perceived Value-Price]
- Firm’s Incentive to Sell = [Price – COGS (Cost of Goods Sold)]
Price point and structure
The more your company can leverage structure as part of its pricing strategy, the stickier is going to be for your company for a number of reasons:
- It’s harder for your competitors to copy it.
- It naturally drives upsells. If as a consumer you see three different price levels, you are going to consider which one of them is offering you the best value compared to the others. It also provides entry options for people that may not have the financial capability to access your product. Once you have them, even at the lower point of entry, you can work to build them up to higher prices over time.
One downside of price structure is that you can make it too complicated.
Pricing and CLV (Customer Lifetime Value)
What is the value you want to see out of that customer over time? You also want to be sure that the CLV is greater than the CAC (Customer Acquisition Cost). If not, you don’t have a profitable business, to begin with. So, when considering the price you have to look at:
- Customer Acquisition Costs
- Customer Break-even Analysis
- Lifetime Value Analysis
When considering your price strategy, try to understand your buyer persona (this is valid for B2B and for B2C). Know who the targeted audience is, how they buy, and what their price sensitivity is. That ties into things like customer economics, customer search and usage, and competition.
- Will the decision maker pay for the product?
- Does the cost of the item represent a substantial percentage of the total expenditure?
- Is the buyer the end user? If not, will the buyer be competing on price in the end-user market?
- In this market, does a higher price signal higher quality?
Customer search and usage
- Is it costly for the buyer to shop around?
- Is the time of the purchase or the delivery significant to the buyer?
- Is the buyer able to compare the price and performance alternatives?
- Is the buyer free to switch suppliers without incurring in substantive costs?
- How is this offering different from competitor’s offerings?
- Is the company’s reputation a consideration? Are there other intangibles affecting the buyer’s decision?
Pricing and business’s goals
Considering your business’s goals, you can skim pricing or use a penetration pricing strategy.
Skim pricing when:
- You can show value to justify a premium
- You think new entrants/substitutes are unlikely
- You need higher margins for “push”
- You need funds for R&D/Marketing
- You want to signal high quality
About price signal
Ask yourself this question, what is the message my pricing is going to send relatively to the rest of what I’m doing in my business? A successful pricing is dependent on the synergy between:
- Price and image
- Price and the rest of the marketing mix
- Price and company philosophy. Ex. Swatch “Price has become a mirror for the other attributes we try to communicate” – Nicholas Hayek
Penetration pricing when
- You want to stimulate rapid trial
- You want market share and long term “annuities”
- You want to deter new entrants
- You must displace low-priced substitutes
There are four traditional pricing models
- Deal Oriented – Pricing is managed on a deal-by-deal basis
- Value-based – Pricing is consistent with the value returned to the customer
- Competition-based – Pricing is established based on what the competition is charging
- Cost-plus – Pricing is a function of total cost + markup
You usually end up using more than one pricing model, for example, value-based and competition-based, cost and competition-based.
There are also mobile pricing models
- Free – Free; revenue comes from other sources: Free to Premium, in-app purchases, in-app advertising, subscriptions
- Paid – One-time payment
For mobile monetization see my post 6 Common app monetization models
Pricing and the TALC
When designing your pricing strategy, keep in mind that pricing change relative to the market. You need to understand where is the market today and where are you plugging in. Are you in the early stage where early adopters are not so price-sensitive? And then, as the market is maturing you start thinking about a value-based pricing model where you get as much money out of the market as you can.
When the market is at its peak, you move to a competition-based model.
Pricing and the role of marketing
Is your product marketing intensive or sales intensive? Here you need to consider things like:
- Price (cheap/expensive) How much is the customer willing to pay? Is a big or a small economic decision for the buyer?
- Market size (many customers/few customers). The market size is determined by the quantity of potential customers. A lot of potential buyers=marketing intensive. Few potential customers=sales intensive.
- Level of complexity (simple/complex). Complex products tend to be sold no marketed. Products that require education, manuals, and customization to derive utility are sales intensive.
- Fit and finish (high/low). Is it an out-of-the-box solution or something that requires multiple steps or points of support to operate?
- Customer (B2C/B2B). Identify if you are selling directly to companies or to people? There are more consumers than businesses.
- Relationship (single transaction/long lifetime). Customer economic lifetime. Do you expect to have a long-term relationship with the customer? The longer the lifetime of the relationship the more consideration goes into how you deliver and sell the product.
- High-touch or low-touch selling. A complex product requires relationship-building, long, complex and technical selling campaigns. With low-touch selling, you don’t need to customize sales according to the relationship.
Understanding the mobile app marketing funnel
Stage 1 Exposure and discovery
In this stage, marketing helps drive awareness and app discoverability. For mobile apps, the “purchase decision” time is the time it takes to decide to download the app. This time can be relatively short.
According to Google’s research, the main sources of awareness of smartphone apps are:
- 52% friends, family, and colleagues
- 40% browse the app store
- 27% search engines
- 24% company website
- 22% TV
Some marketing tactics to use at this stage.
Here you can use most of the tactics we use for the traditional marketing funnel (PR, social media, email marketing, internet forums, Q&A sites, social bookmarking)
Then we have a specific mobile app tactic which is ASO (App Store Optimization)
Many tactics for paid customer acquisition are the same as traditional marketing. Some paid tactics to use to help discover your app:
- Affiliate marketing. App marketers join an ad network to create featured widgets and code snippets that other app or web publishers embed on their platforms, and the app marketer pays affiliates a small fee for each download.
- App install ads
- Retargeting ads
Stage 2 Consideration
For apps, much of the consideration stage is done via app ratings, reviews, and social proof on the app page in the app stores. This stage is about demonstrating trust signals.
Tactics. Focus on the app page and app ratings and reviews
Stage 3 Conversion
Depending on the type of app you have a conversion can be different things, downloading the app, signing up for a subscription, making an in-app purchase, setting up an account, etc.
- Onboarding (see guide to mobile app onboarding)
- Usability and visual design
Stage 4 Customer relationship
Build customer relationships by identifying the appropriate mobile moments to proactively communicate with your customers.
First, you will need to identify the right mobile moment, for example, moments when you can alleviate a frustration or after a positive experience.
- Personalized messaging. Personalize messages using customer data
- In-app communication. Provide a way for your customers to communicate with you within the app. Provide access to an in-app feedback button.
Stage 5 Retention
Respond to users’ feedback and ask them directly to leave feedback.
- Frequent app updates
- Feedback outlets
- Fresh content
- Push notifications
- Loyalty programs
Some notes to optimize your mobile app funnel
In order to optimize your mobile app funnel, think about it in a quantitative way. Break down the numbers. For each stage annotate the total users you are getting, the % that pass to the next stage, and the % that drops off.
It’s also important to segment your funnel into the at least following segments:
- User type
- Behavior (WAUs, MAU, used X feature, etc)
Understand the drivers of that funnel, how and why do people purchase? Where in the user journey do people buy? What value propositions do users care about?
Read more about pricing and marketing funnel
Our 6 must reads on pricing a product
Leslie’s compass a framework for go to market strategy
The mobile app marketing funnel
The mobile shopping life cycle
What marketing funnel metrics really mean
A quick guide to value-based pricing
How customers perceive a price is as important as the price itself
More on Mobile Marketing
Foundations of a cross-platform marketing strategy – Mobile marketing
How to design effective user acquisition campaigns – Mobile marketing
Guide to mobile app onboarding – Mobile Marketing
How to increase user engagement – Mobile marketing