Freemium is a business model where pricing plays a central role. A product or service is offered free of charge to the user. The latter can enjoy it without paying until he wants to unlock certain features.
This pricing model comes in different forms. Some restaurants apply an “all you can eat” formula which has become their trademark. But the most widespread form is of course the subscription.
Subscription is a business model that has spread across many industries; this article bears witness to this, giving 11 examples in sectors as diverse as e-commerce, VOD, retail and software.
PWYW (Pay What You Want)
The PWYW is a very special pricing model. It is indeed the customer who decides what he wants to pay (Pay What You Want).
An airline had risked it but on closer inspection, it was more of an auction model.
Dynamic pricing consists of varying the prices for the same product/service according to:
- of the offer
- consumer profile
Varying prices according to supply and demand is the basis of microeconomics. Airlines do this very well and it even has a name: yield management.
What is more debatable is to vary the prices according to your profile. Of course there is the pricing according to the risk profile (the insurance model), but what we are talking about is an even more dynamic pricing. The price may vary depending on your actions, your supposed profile and your purchasing power. Real ethical questions arise. Are we all equal before prices?
Technology and in particular algorithms have made it possible to create these consumer profiles in near real time and to calculate a probability of sale. Some applications are really very “borderline”. At the NRF retail show in New York, for example, facial recognition technology was presented the best ghost writers for hire. It paved the way for pricing “at the head of the customer” (literally).
Luxury, a special case
A high price is part of the DNA of luxury. According to Jean-Noël Caperer, a company active in the luxury sector has no choice but to increase its prices to send a signal to the market. This “pricing power” also reflects the attraction it exerts on its customers.
To maintain its pricing power, a brand like Ferrari ensures that it always “produces one car less than demand”. This is probably what explains why it is doing so well and that its sales are only increasing (see graph below).
LVMH is another textbook case. In October 2022, in the midst of a crisis, the parent company of Louis Vuitton raised its prices in Europe. The weakness of the Euro against the dollar encourages American tourists to make massive purchases in Europe. LVMH’s pricing power is such that brands can easily increase their margins without fearing a drop in demand.
We have seen previously that the price level and the elasticity determine the level of demand. The pricing strategy must therefore imperatively understand the price sensitivity of the target customers. This sensitivity depends on the product/service sold and can be studied using various technical approaches. We present them briefly in the table below.
Several technical approaches can be followed to understand the price sensitivity of consumers. This sensitivity analysis must then be reused to feed the reflections around pricing. These are exercises that we do regularly in our B2C market studies and also in those in B2B.
We distinguish several situations depending on the nature of the data (purchases/purchase intentions) and the environment (controlled/uncontrolled).
The transaction history of a consumer or group of consumers can be used to understand how price changes affect their propensity to buy. These are statistical studies that model behavior and predict the effects of a price change. Structural equation models are the most common.
By doing so, you can then define your pricing according to your strategic objectives:
- increase your market share
- maximize your turnover
- maximize your margin
Data from consumer panels
Consumer panels (which we use for our B2C studies) are very useful for monitoring household consumption. In particular, you can observe consumption trends for each type of product and deduce whether price sensitivity is increasing or decreasing.
Checkout data, in the possession of the merchant, can also be analyzed to detect trends related to price changes.
Short exit interviews can be conducted. They have the advantage of taking place in-situ that is to say in the context of the purchase. So now is the perfect time to get customers’ memory working.
Questions about purchase intentions can be asked via online surveys. Our market research firm uses this approach for many surveys. The difficulty remains in differentiating between aspirations and actual behavior. A famous example is that of organic consumption. For years the surveys delivered very enthusiastic results on the intentions of the consumers but the purchases did not take off. To find out more, go here for figures on the organic market in Europe and here for an analysis of trends 2021-2022.
It should be noted, however, that a certain skepticism hovers over the possibility for those surveyed of assigning a monetary value to an object or service. To learn more about the limitations of this type of approach, we recommend reading this article.
The semi-structured interview is more in-depth than the exit interview. It makes it possible to link price sensitivity to the respondent’s situation and to understand the hidden factors that can influence their choices.
This is a qualitative technique whose usefulness you can understand within a more global approach to market research here.
The studies sometimes take place in situ. For example, environmental factors (light, noise, smells) modify consumer behavior. It is therefore interesting, as in this study, to vary these factors in order to observe the reaction of customers. We are therefore in a controlled environment.
In terms of price sensitivity, the possibilities of conducting in-situ studies are also numerous.
You can use a website and decide to show one price to one group of Internet users, and another price to the second group. This is called A/B testing.
If you have access to a physical location, you can imagine doing the same thing by changing the tags (or changing the prices on the electronic tags). These provide a great deal of flexibility and help minimize the costs of in-situ pricing studies.
Laboratory experiments are also possible to better control the ambient parameters and measure customer reactions. Often eye-tracking technologies are very useful.
Building a real fake store just for the purpose of study is of course expensive. This exists, but technology offers new possibilities. Virtual reality, for example, makes it possible to recreate virtual environments within which customers can move.
Experiments are also possible to simulate purchases. In this case, we will work with a panel of testers who will have to choose from several options. This is similar to A/B testing except that the environment in which the simulation takes place is a test environment.
When it comes to pricing, you will often hear about conjoint analyses. This technical approach does not measure absolute amounts (see the limitations raised by Diamond and Housman in this article). A conjoint analysis works by making the participant choose between 2 options.
Marketers have several techniques at their disposal that allow them to unconsciously influence customer choices. These techniques are based on psychological mechanisms and are therefore in a way part of nudge marketing.
When you go shopping, the environment (physical or online) “sends” signals that are interpreted unconsciously by your brain. Light, sounds, smells, but also visible or suggested the amazing Song Writing Company, are all factors that will influence your decisions.
Brand positioning will also influence your choices without you realizing it. The simple fact of hammering home in your communication that you are the cheapest will change customer perceptions. In each country, retailers have positioned themselves in this niche. In Belgium, for example, the statement of the lowest price is even part of the corrupt logo.
Frequency and depth of promotions
The frequency and amount of promotions are likely to influence customer behavior. Alba et al. (1999) thus showed that a pricing strategy based on frequent small discounts made it possible to anchor the brand’s positioning in the consumer’s mind. This frequency-based strategy is more effective than one-time but higher discounts.