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Matt Eggleston

How to Start with a Pricing Model: A DeveloperTown Case Study

developer-townSince the tech bubble burst, just after the turn of the millenium, the practicality of website’s reaching their hypothesized valuations has been a matter of intense debate in the business press. These debates have once again been renewed recently with markets at all time highs and a recent string of tech IPO’s.

Now more than ever it’s important to have a pricing strategy which ensures the sustainability and ultimately the profitability of any digital venture such as a website or mobile app if you are to be able to convince investors of the viability of your venture.

At DeveloperTown, we are working to bring the joy of playing piano to people across the country via an online lesson environment, Piano in a Flash. To monetize the website we had to choose what we believed was the ideal pricing strategy from any of the three primary pricing models: e-commerce, display advertisements, and subscription.

E-commerce models allow users to create a free account which then enables them to purchase goods on the website. While Amazon is the clear leader in this space, this pricing strategy is also popular with mobile game producers. Mobile games allow users to create a free account to play but then encourages these users to purchase digital goods within the game environment.

Display advertisements are what social media companies like Facebook rely on for a portion of their revenue. These are the ads you see on the sidebars of the page as you scroll down your news feed. Each time a user sees (impression) or clicks one of these ads Facebook collects a small piece of revenue from the advertiser.

Lastly, subscription models are common with the online versions of newspapers such as the Wall Street Journal. The subscription model helps protect WSJ’s intellectual property and eliminates the ability for readers to consume content without first paying for access.

It’s important to realize these models are not mutually exclusive. Most notably, Amazon allows sellers to advertise their products alongside search results. This enables Amazon to collect revenue from both display ads and a commission from every transaction on the website. Likewise, WSJ sells display advertisements on it’s website and mobile apps which allow the company to earn revenue from both subscriptions and display ad sales.

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With Piano in a Flash we currently use an ecommerce pricing strategy which allows customers to buy an individual piano course or bundle of courses for a one time price and receive unlimited access to the content from a single purchase. However, just because this is our current pricing strategy, doesn’t mean it’s optimal.

Just like you should always analyze your website analytics to optimize the site’s design and user experience, you should similarly run tests to ensure you have the optimal pricing strategy and pricing points. In the coming weeks we’ll try out a monthly subscription model for Piano in a Flash to see if a lower initial price point will improve the conversion rate and increase the lifetime value of a customer. One cautionary note, be sure when you run pricing experiments to not only analyze conversion rate and instead focus on the life time value of customer which takes into account recurring revenue from monthly subscriptions.

Finally, once you’ve found the optimal pricing strategy for your website you can then begin to focus on diversifying the revenue stream of your digital property. In the future, with Piano in a Flash we could add display advertisements inside the lesson environment to advertise piano keyboards or accessories. We could also partner with music supply stores to sell keyboards and pianos and collect a commission on the sale of these products.

In short, the pricing strategy for your website or app is crucial to it’s survival. Once you have devised an initial pricing strategy you should test it against available alternatives to arrive at an optimal pricing model. Finally, once you have a strategy which is able to sustain your digital product you can experiment with different strategies to diversify the revenue stream and increase the lifetime value of your customers.

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