Pricing is a tough nut to crack. Especially when we look at high-tech products and services, the matter gets even more complicated. For this specific reason, I am not going to address the basics of pricing, and I will focus on the many complications that arise from pricing XR products and services.
By the end of this article you will learn:
How the 3C’s of pricing (Costs, Competition, and Customers) apply to XR services
Broaden your perspective on Cost and Benefits for XR services
Actionable advice for a customer-centric pricing strategy
Get comfortable, grab your coffee, and enjoy the ride.
When developing a successful XR pricing strategy there are at least three factors you have to carefully consider: Costs, Competition, and Customers.
The 3 C’s of pricing could be compared to the three legs of a stool… forget one of them and you are going to fall badly.
Costs: The costs that you encounter to develop your product or service provide the floor below which you ought not to price. An important cost-based pricing concept for XR companies derives from a company’s “experience curve”. Especially for high-tech solutions like XR, costs are not constant. During the early stages, the amount of time and effort needed to craft a new experience or add a new feature is substantial. In time, due to the accumulated learnings and acquired specialization, those costs are expected to decrease. This reduction is most prominent during the early stage of the product and flattens to a minimum once the product becomes an off-the-shelf solution. One possible strategy arising from this phenomenon is to price aggressively early on to attract new customers ( get a first-mover advantage, grow the installed base, attract a key customer belonging to the early majority) or discourage competitors. A second pricing possibility is to lower your prices as the experience curve kicks in. This partially addresses the price resistance of later adopters who, unlike early adopters, are less excited about the technology and more keen on ROI (to learn more about the gap between early adopters and early majority check out my other article about the XR chasm).
Competition: Competition provides a benchmark against which to evaluate prices. Positioning yourself against the competition can also define your market strategy. A clear example is the ongoing “battle” between Valve and Oculus: Oculus geared and priced towards a mass-market, while Valve targeting a more premium niche (sorry HTC… I think you are out of the game). A common mistake made when addressing competition for high tech services is to assume there is NO competition due to the intrinsic novelty. I believe this statement is a double-edged sword. A customer can always choose not to use AR for their marketing campaign and keep solving their problem “the old way”. Especially for bigger organizations the resistance to change and the “status quo” are your worst enemies. I strongly suggest you to view the competition more broadly, in terms of alternative ways of satisfying the same customer need. This might lead to a better understanding of competitive threats and opportunities.
Customers: customers’ perceptions of value provide a ceiling above which you should not price. It is known that people buy “stuff” for reasons that go beyond hard benefits, and XR is no different (actually even more so). The common pitfall is that we often find XR so compelling, effective and “innovative” that we assume the benefits are crystal clear. On the other hand, the clients' perception might be very different and takes into account other factors like switching costs, learning effort, and so forth. Let’s try to list “benefits” from a broader perspective:
Functional Benefits: The utilitarian aspects that might be attractive to engineers or technology enthusiasts. An architect might find particularly appealing the opportunity to model and experience the “space” in ways that are not possible with standard cad software.
Operational Benefits: This represents the product’s ability to increase efficiency for the customer. A virtual tour would allow real estate firms to do a prescreening of the available properties with clients.
Financial Benefits: This is what most buyers are after (or at least that is what they most often claim), and it boils down to a simple question: if I buy this, will I make more money? What is the increase in conversion by using this AR app for my next marketing campaign?
Personal benefits: This includes the goal of being an early adopter, purchasing from a well-known brand, dealing with a trusted partner to avoid risk or any sort of psychological satisfaction triggered by the purchase (please read this again and take a moment to let this really SINK in).
All these pieces are part of a very complex puzzle for which there is no one-fit-all solution. The first step to address this riddle is acknowledging that purchasing decisions are made by individuals and NOT organizations. I am a strong believer that business happens between people and not entities. Consequently, every person in the room is, inevitably, longing for different benefits. Discovering those is going to help you tremendously through the sales process.
Benefits (in whatever form) are always weighed against the costs. The costs perceived by customers are also perceived differently and might include:
Monetary costs: The price paid, as well as installation, operation costs and maintenance. A VR training facility does not operate itself. Where will it be installed? What if SteamVR or Nvidia break something during the latest update? What will it cost to update the look of a crane that is used in a VR training simulation?
Non-monetary costs: The risk of product failure, obsoleting of a prior software or solution and learning costs are just some examples.
One way to look at all these variables from a customer perspective is to define the total cost of ownership. It is defined as the total amount spent by a customer to own and use a product or service. Using the total cost of ownership in your pricing strategy can also help position yourself relative to your competitors. Showing that a product’s total cost of ownership is lower than a competitor’s can be a compelling benefit to a customer. Similarly showing the customer that buying the cheapest product on the market might result in the most expensive product to own can also provide a compelling purchase rationale.
In summary, a solid consideration of costs, competitors, and customers is vital to establish a successful XR pricing strategy. Focusing on costs alone can be shortsighted and lead to serious problems. Similarly, focusing solely on the competition is hard on the XR market where the real competitor is often the customer’s current behavior. Both of the drawbacks point to the value in taking a customer perspective in pricing.
Here are some key recommendations to help you on the way:
You must understand how the customer is going to use your XR product. Because of the varying requirements in their end-to-end solution, customers evaluate costs and benefits of a specific product in terms of a complete usage system and not just in terms of an isolated part of that system. This concept is particularly relevant for many XR studios who approach a wide variety of verticals. Despite a VR surgeon simulation is used very differently from a hospital and a university the core functionalities are basically identical.
You must focus on the benefits customer receive from using your product. I want to stress once again the importance of looking beyond the financial figures and explore the whole range of benefits your customer might be after. In analyzing benefits, you must not fall into the trap of focusing on features. Technical crowds (yes you….) often stress the cool technical wizardry of the experience they create. This often leads to confusion and moves the conversation away from what should be the real focus of the relationship (the customer) in favor of something that nobody really cares much about... you ( I know you saw that coming ).
You should calculate customer costs. Do not stop at the purchasing costs and based on the first recommendation, figure out what other monetary and non-monetary costs your customer is going to face when adopting your solution. Going in-depth might also reveal opportunities for facilitating the adoption or upselling extra services.
Following these steps in customer-oriented pricing leads to at least two clear emerging advantages. First, this helps realize that pricing considerations shouldn't be made after a product is developed, but early in the design process. Treating price as a design variable really helps understand the relevant cost/benefit trade-offs involved for the customer. Second, this analysis shows that different customers in different verticals will value the same product differently. Prices must account for both the Customer's perceived value of the product and the cost to serve a particular customer account. Understanding that different customers, value the product differently and that different customers require a distinct level of service, means that the profitability of different customer accounts can vary widely.
As usual, I want to end with a little summary of some key actionable points that were discussed in this article:
A customer-oriented pricing for XR services is highly recommended (without forgetting to look at your costs and competition)
There is much more to Price and Benefits than what your customers tell you. Do not be afraid to dig deeper by asking difficult questions (check out my list of 30 questions to qualify your XR clients).
Look at the sales process as the skeptical buyer instead of the XR enthusiast is the first step toward understanding your customer, talking in his language and fulfilling his needs.
If you found this article useful share it with your network and do not forget to give me a shout if you need help in developing a customer-centric sales process or you have an investment pitch planned in the near future.