Perhaps it is because I am getting old, perhaps it is because I am a pricing consultant and I don’t like giving things away, but there is something about the word ‘Freemium‘ that triggers a little retch in my oesophagus every time I hear it.

We work with quite a lot of tech companies, helping to price their offering and the conversation usually starts like this “We want your advice… here is our first stab at pricing… what do you think?”

We are then presented with what we describe as an ‘open grid pricing schedule‘. You have all seen one; a table with features down the left hand side and price packages across the top. The packages are either boringly called ‘Freemium’ ‘Silver’ ‘Gold’ and ‘Platinum’ or ‘Basic’ ‘SME’ ‘Enterprise’. Then someone has helpfully filled all the boxes with little ticks to show you what you get in each case. The list of ticks gets longer the further you go to the right.

This is fine if you are selling a standardised piece of consumer software or access to an online service for £20 a month or so. However we keep on coming across clients who are trying to sell sophisticated bespoke B2B software and service packages this way.

My theory is that being techies, their starting point was the ever-present Excel spreadsheet. Whilst setting out some rough segmentation and price positioning in a spreadsheet is OK, publishing it to the whole wide world is another matter. Those mesmerising little rows of boxes force you to think in a certain way… a way that is not necessarily helpful when setting prices.

Although it might seem open and friendly to plonk all of your prices on your website, we tend to start with the question: Do you really need to tell everybody what everybody else pays?

Open-grids work when you think people will be initially tempted with the cheapest option and then either at the point of purchase of subsequently, trade up to a better package. If you are pricing to the value the product delivers to them as a customer you will find a very much wider range is needed than would look sensible set out in one of these grids.

The golden (or should I say platinum) rule is that your web prices are the highest you will ever charge. What happens if your software or service package is worth millions to a really big client and stretching your Platinum package beyond £99 a month would look silly in the context of the grid?

The moral of the story is: By all means use excel to record your prices for internal purposes, but segment your market first before deciding to show your knickers to all and sundry.

Perhaps you have a product that is so unique that you cannot begin to imagine how much you can charge for it. Perhaps it is a software product that has no direct cost attached to it… so there are no clues to be had there… it is always going to be a 100% margin product whatever the price. Perhaps it is a service for which the customer will have no obvious benchmark. Here is a little technique to help you come up with a figure. We call it Relative Value Comparison and this is how you go about it:

Firstly figure out what benefits your product can deliver that could be expressed financial terms e.g. profit made, money saved, time saved, new customers won.

Next try to lay your hands on the kind of figures the client (or a typical client in the sector) would recognise e.g. if your product helps win new customers, then find out what revenue they would expect from an average customer.

Then craft a little sentence that starts with “If our product only….”

Something like:

“If our product only wins you three more customers worth £20k a year, then isn’t it worth giving it a try for £x”

or

“If our product only prevents one breakdown in its twenty year life, if that breakdown results in 24 hours of downtime at a cost of £3,000 an hour that is £72,000. Isn’t it worth avoiding that for £x”

Once you have done this, you need to read the statement quickly out loud and without really thinking about it, put in a value for x that seems to make sense. If you are democratic soul have a few colleagues do the same.

This little trick is a good way to find a price that ‘sounds right’ in the context of the selling process. If it sounds right in your head, then the chances are that it will sound right if made as part of similar justification to a prospective customer.

WARNING: The technique does not work if you then plonk the price on your website without the justification.

The moral of the story is that: The means by which you justify value is at least as important as the price figure itself.

PS The technique also works when justifying a higher price than a competitor. Craft a statement that values the risk of an inferior product. “If our product only saves you having to…. Isn’t it worth just another £20 to be sure you wont need to”