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Pricing Strategy- Sell a ‘Vehicle’, price the ‘Fuel’

Pricing a product is one of the most high-risk and ambiguous activities. You are often not sure what is going to work best for you, and it is one of the most important aspects on which customers make their decision. Adding to your dilemma are expert advises on Psychological Pricing, which means your pricing defines a perspective about your product and how you can play with it to be highly profitable and successful. [Consider reading – Psychological Pricing Is Your Golden Ticket to Selling More]
You are probably looking at a number of basic factors, that are your first thoughts on pricing:

  • What is the business value you are adding? – Why are your clients going to buy your product? what tools or business processes are your going to replace and what is the cost of doing things now? Often called “Value based Pricing” which is highly recommended by Business Scholars. [Consider reading – A Quick Guide to Value-Based Pricing]
  • What are your competitors charging? – This single question becomes a benchmark for you, that almost blinds you against more strategic approaches. Often called “Competitor Benchmarking“, though not recommended but becomes a reality for most businesses or startups.
  • What are your costs that you need to sustain? – You need to become a viable business, even if you are loss making today you need to be profitable after hitting Economies of Scale, so what is the minimum amount you really need to charge? Your Cost doesn’t tell you what you should do, but it tells you what you shouldn’t. [Consider reading – The Startup Success Formula – “Economies Of Scale”]

Now that we have taken a quick tour of the complex aspects of pricing, I will introduce a Pricing strategy that demands you to think out of the box, and I would call this – Sell a ‘Vehicle’, price the ‘Fuel’

This is a variation of Two part pricing, with extra innovation and extra returns. You can see numerous simple examples of it –

  1. Credit Cards are sold free – Yes Credit cards are free, and we all know what it means 🙂 You distribute credit cards free so that you habituate the user to swipe on credit and you create enough opportunities of charging him along with making your cut on the merchant’s transaction.
  2. GSM SIMs are damn cheap or free – This is probably most straight forward, you don’t need to make money on the SIM, it just opens doors for new customers to start using your service.

Now let’s get into some not so obvious examples, which in-fact are being priced Win-win.

Apple’s i-Pod and i-Tunes Pricing Strategy

Yes, you need to sell more and more i-Pods to sell more i-Tunes. But what is more profitable for Apple the ‘Vehicle’ or the ‘Fuel’. Many would agree that this is a counter scenario were Apple has been pricing the i-Pod as a premium product, whereas i-Tunes have been priced modestly. But considering the reality of piracy on the internet for songs, they have in-fact re-created the market for selling songs online.

Amazon’s Kindle and e-Book Pricing Strategy

Again, you are complementing e-books with Kindle, though in this case e-books can be purchased or downloaded outside Amazon, but you are in-fact creating more convenience for them. By making e-books convenient you are strategically trying to strengthen the usage of “Books” in the current internet & digital age. As Amazon had started off selling books, this becomes of high strategic importance in pricing the ‘Fuel’ and keeping its market alive.

Android’s Open Source OS and Play store Publisher’s Pricing Strategy

Yes, Android is an open source Mobile Operating system, with no strings attached for its users. But it is a strategic miracle combining multiple structures. It opens itself to a network of App developers who develop Apps which enhances the capabilities of Android and creates barriers to entry for new operating systems. And yes they charge the App publishers by luring them with the free user base they have gained. Keeping it simple for our context – They distribute Android for free and earn from Play store, majorly from App developers.

I hope these examples are going to help you think a little outside the box while iterating over your business models, product landscapes, etc. All feedbacks, comments, criticisms welcomed! Cheers!

Mohammed Jamil Nasir
Nasir manages Products, by providing business oriented technology solutions. He is at the center of discussions ranging from a long-term vision or competitive strategy, or improving business processes, or a client demo, or the right marketing strategy, to, project delivery commitments, or improving UX, or technical architecture, or recruiting developers. He has a Global MBA from S P Jain, Engineering in Computer Science, 6 years of work experience and a flair for writing & poetry.