Choosing a pricing structure

I currently provide an online service where I sell "credits" in blocks.
I sell them in blocks for $10, $25, $50, and $100.
At present the unit price per block is the same (e.g. 30 cents per credit, no matter which block you purchase).

I'm thinking of changing my prices so that the $100 block will stay at 30 cents/credit, but the smaller blocks will cost more per credit. This is to encourage people to purchase credits in larger blocks.

a) is this a good idea? or will this discourage people from making any purchase (since they dont want to spend $100, but dont like the price per credit for the $10 block)
b) will this annoy my existing customers, some of whome purchase small blocks consistantly, some of whome purchase $100 blocks.

Cheers,
Mick

I expect that when I buy credits in volume that I will get a discount. It would annoy me if I did the math and found there was no cost savings.

I would communicate the change to exsisting customers in the cotext of this change will allow you to provide better customer service. I think you can provide a nice coupon or "double your credits" offer to existing customers to sweeten the switch.

If you were considering lowering your prices for the more expensive blocks, then this would be fairly uncontroversial process. I think that fact that you're considering raising prices for the cheaper blocks is what's causing the grief.

But I don't know your business so I won't tell you how you should change your prices.

However I will say that if you're sure you'd like to raise prices, then I have a strong suggestion: treat your existing customers and your future customers as totally different groups. More specifically, you should grandfather in all of your existing customers and protect them from any price increases.

When people have already made a decision to spend money with your company, they feel like they've entered an agreement. You've agreed to offer your product or service to them, and they've agreed to pay you a specific price. When you decide to unilaterally change prices, you're messing with the terms of that "agreement" and people can grow frustrated and lose faith in your business.

Look at what happened to Netflix over the past few months. Not pretty.

If you want to raise prices to help capture more revenue, only offer these new prices to new customers. This will ensure that your existing customers don't feel cheated or rise up in revolt.

Raising prices is never an easy decision, even thought it can be the right one for your business. Good luck!

Raising prices, or changing the effective price according to the size of the pre-purchase, is a reasonably common approach. It's justifiable in most cases, and it works, if you're careful.

So the real issue - the question behind the question - is how to get a price increase through, without alienating existing customers.

You need to start off by doing some analysis, looking at buying behavior in your established base. You need to identify the main patterns of purchase and usage - for instance, do bigger purchasers tend to buy more frequently, or buy larger blocks? In the data there will be some big clues to segmentation. So make a tentative breakdown into two, three, maybe four segments where you find similar behavioral characteristics.

Now look at how the price change you're thinking about would affect each segment, (a) if they continued their present spend/use patterns; (b) if they optimized their expenditure by buying larger/smaller blocks; (c) if they locked their spend at present levels by varying their usage. Work through the winners and losers per segment, and think about how you would communicate the changes in each case.

Then experiment with different ways of making a price increase, and repeat the analysis. For instance, alternative ways to increase your price and introduce the relation between credit block size and discount include:

• Raising the price of a single credit + introducing a new 'super-size' block that matches or beats the 30 cents
• Leaving the 30 cents intact, but raise the first tier, i.e. if you could previously buy 10, 50, 250 credits, the new minimum might be 50, or 25, or some other figure higher than 10

All of this will help you get underneath the question of what the price increase will mean for your consumers in each segment. This arms you both to choose the best way of creating a targeted price increase, and to communicate meaningfully with existing customers around that increase, possibly using special offers to soften the blow (and bring forward revenues).

All of that takes work. Trust me, it's worth it!

Finally, it's worth bearing in mind a pattern used in consumer goods to make price increases. Let's invent Grungies: just one Grungie added to your wash makes your delicate clothes last longer. They're sold as a pack of 50 for a typical retail price of $5.

So that's equivalent to 10¢ per Grungie, right? Yes at the moment, but that's going to change.

So you want to push through a price increase equivalent to raising the pack price to $6 - a 20% increase. But you don't want to lose out.

Your first step is to introduce a new convenience pack - 10 Grungies for $1.50. You run that alongside the current pack and pricing. Sales figures help you validate whether a market for Grungies at significantly over the current effective unit price.

You now have four cases.

First, it may be that the indications are that you can not only increase the price, but that you may be able to increase by more than the 20% target. Woot! You now have all kinds of options.

Second, it looks as though there's room for a price increase, but not at the 20% level. Your next price move is going to be to try and zero in on the level the market will bear - again, there are several options.

Third, it looks as though increasing the price will have a negative effect. In that case, the next theory to test is that a price reduction may actually increase profit. Look at that! We're off on another track, without ever upsetting existing customers, or having to go into reverse.

Finally, it looks as though the 20% is realistic. Raise the price of the 50 pack to $6, and soften it with a temporary promotion - 64 for the price of 50, say. That promotion was slightly better value than the old offer, and when it ends, the new pricing's in place. All that's left to do is to tidy up - work out whether having two pack sizes instead of one is an improvement, and if not, what the optimal size and price will be.

Now, go round your local supermarket and start taking guesses who's in the middle of testing price increases! (Bear in mind that in the real world of consumer goods, there's also competitive pressure, so approaches that signal intent without opening too much of an opportunity for competitors to jump in opportunistically and steal market share.)

By thinking through these simple but high stakes sequences, you'll understand better how you can achieve similar results yourself, and what promotional tools you can use to maximize your results and minimize your risks.