Revenue Models & Pricing

Innovation & New Business Proposal - TUHH Institute of Entrepreneurship & Institute of Innovation Marketing, Hamburg · part of my Technology Management MBA · study notes for revision.

---

Every chapter up to here has been about the customer: who they are, what they need, which attributes satisfy them, what trade-offs they make. This chapter is about the other half of the exchange. Having a product people want is not the same as having a business, and the bridge between the two is the question of how money moves from the customer to me.

The session splits that question into three, and keeping them separate is genuinely the most useful thing in the whole topic. They are not three names for the same decision. The revenue model is a strategy question about the form of the transaction. The pricing mechanism is a tactical question about how the number is arrived at with the customer. Setting the price is the arithmetic question of what the number actually is. A team that argues about the price tag before deciding whether it is selling a product, renting one, or taking a cut of somebody else’s transaction is arguing about the wrong thing.

The second half of the chapter is where the money is hiding. Pricing turns out to be the single most powerful lever on operating profit, more powerful than an identical improvement in volume or in cost, and yet it is the lever founders touch last and with the least evidence. So the closing sections are about measuring what people are genuinely willing to pay, rather than guessing.

Tip

The one idea to carry through. Revenue model, pricing mechanism and price are three separate decisions taken in that order - what, then how, then how much. Decide the form of the transaction first, because it determines which pricing tactics are even available to you, and only then put a number on it, using measured willingness to pay rather than a mark-up on cost.

1 · What, how, and how much

Revenue modelWHAT? the strategy you use to generate cash from customers

→

Pricing mechanismHOW? the tactics you use to set the price with customers

→

Setting the priceHOW MUCH? actually putting a price tag on it

The three-level framing the session returns to three separate times. Each level narrows the one below it: the model decides which mechanisms are possible, and the mechanism decides what kind of number you need.

An example makes the sequence concrete. If I decide the model is a subscription, then bargaining over each deal is more or less off the table, tiering by customer segment becomes the natural mechanism, and only then do I need a monthly figure. Had I chosen a brokerage model instead, the number I need is not a monthly fee at all but a percentage of somebody else’s transaction. Same product, completely different pricing conversation.

2 · The revenue model taxonomy: follow the title

The cleanest way the session organises revenue models is by asking who ends up owning the thing. Ownership, or title, either transfers to the buyer or it does not, and a third family sits between two other parties entirely.

Title passes to the buyerone transaction, then it is theirs

Asset salethe straightforward one: the buyer pays, the seller hands over the goods, and the buyer then owns them

Title stays with the sellerthe customer buys access, not ownership

Usage-based feethe buyer consumes a service and the more they consume the more they pay, as with telephone minutes

Subscription feethe buyer pays for time-based access to a service, as with a gym membership or a streaming service

Rentingsimilar to a usage fee, but the buyer pays for temporary exclusive access to an asset, as with office or car rental

Licensingthe buyer pays for the right to use intellectual property that the seller owns, as with media rights

Middlemanyou are paid for standing between other people

Brokerage feea fee for providing the service of connecting two or more parties, as with real estate agents or card issuers

Advertising feea fee for providing and promoting access to a prospective buyer base

The taxonomy read as a single question about ownership. Note the distinction inside the middle column: a usage fee meters consumption, renting grants exclusive use of a specific asset for a period, and licensing grants a right rather than a thing.

Asset sale = title movesUsage, subscription, renting, licensing = title staysBrokerage, advertising = you never hold title

The practical difference between the first column and the second is cash-flow shape. An asset sale gives one large payment and then silence, so the seller has to keep finding new buyers. The access models give smaller repeating payments from the same customer, which is far more predictable but takes longer to add up. The middleman models are the most capital-light of all, because the goods being transacted are never yours, but they need both sides of the market to be present before either side is worth anything.

3 · Ancillary revenue models

Alongside the main models sits a set the session calls ancillary - revenue earned not from the core transaction but from the traffic, attention and customer list the business has accumulated on the way.

Ancillary model	What you actually get paid for
Referral revenue	Being paid for referring traffic or customers on to other web or mobile sites or products
Affiliate revenue	Finder’s fees or commissions from other sites for directing your customers to make purchases at the affiliated site
E-mail list rentals	Renting out your customer e-mail lists to advertiser partners
Back-end offers	Add-on sales items from other companies presented as part of registration or purchase confirmation, or selling on your existing traffic to a company that sets out to monetise it, then sharing the resulting revenue

These are rarely a business on their own, and each of them spends a little of the trust the customer has in you. That is exactly why they belong in the criteria discussion in section 6, where impact on user experience is an explicit test.

4 · Free as a revenue model

Free is not the absence of a revenue model. It is a deliberate model in which somebody other than the user pays, or the same user pays later.

Variant	Who pays, and when
Charity	One party donates to another
Multi-sided platform	Only one customer segment is charged, and it subsidises the other
Freemium	The basic service is free, and the premium version is charged at cost
Open source	The work is developed by volunteers
Bait and Hook, or Razor and Blades	The capital item is given away free and the consumables are charged for

The common thread is a cross-subsidy, across segments, across product parts, or across time. Freemium and the multi-sided platform are the two that matter most for a digital venture, and both live or die on the same number: the share of free users who eventually convert into paying ones.

5 · The start-up shorthand: eight models by market

The session also lists the models the way an investor would recognise them, tagged by whether they sell to businesses or to consumers.

Model	Market	How it works, with the example given
Enterprise	B2B	Selling software or a service to large firms on a single-licence basis, fixed term and fixed value, renewable at the end of the term (Docker, Cloudera)
SaaS	B2B	Subscription-based licences for a cloud-hosted software solution
Subscription	B2C	Selling a product or service to consumers on a recurring basis (Dollar Shave Club, Netflix)
Transactional	B2B	Enabling financial transactions on a customer’s behalf for a fee, usually a percentage of the underlying transaction value (PayPal)
Marketplace	B2C	Acting as intermediary in the sale of a good or service between sellers and buyers, collecting a percentage of total transaction value (Airbnb)
Advertising	B2C	Offering a free service to consumers and deriving revenue from advertisers, through ads or higher-quality sponsored content (social networks, content sites)
Hardware	B2C	Selling a physical device (Fitbit)
E-commerce	B2C	Selling a physical good online, generally manufacturing or holding inventory of that good

Read against section 2, this list is not a second taxonomy, it is the same one in market clothing: enterprise and SaaS are licensing and subscription, marketplace and transactional are brokerage, hardware and e-commerce are asset sales.

6 · Criteria for choosing a revenue model

The choice is not a matter of taste. The session gives three families of criteria, and a model that scores well on one family can be fatal on another.

Financial does it make money, and when

• Predictability of revenues - recurring versus one-time
• Positive cash flow cycle - do you earn before you spend
• Profit potential
• Fixed versus variable cost structure
• Customer acquisition and marketing cost

Users and customers what it does to the base

• Impact on the user experience
• Impact on user growth - does it speed growth up or slow it down
• Scalability as new users arrive
• Conversion rate into paying users

Feasibility can this team actually run it

• Alignment with the founders’ goals and the value proposition
• Required investment to launch it
• Integration and fit with current business activities

Two of these deserve underlining. Earn before you spend is the criterion that quietly decides whether a young venture survives its own growth, because a model where the customer pays up front funds the next customer, while a model that pays out first has to be financed. And impact on user growth is the one that catches advertising and paywalls: a model that monetises well but suppresses the growth of the base can be worth less than a weaker model that lets the base compound.

7 · Pricing mechanisms: fixed and dynamic

Once the model is fixed, the mechanism decides how the number is arrived at with the customer. The session sorts mechanisms into two camps.

1. Fixed pricing you post a price, the customer takes it

• Fixed list pricing - one published price
• Product feature dependent - bundling
• Customer segment dependent - multi-tier pricing
• Volume dependent - the price per unit varies with quantity

2. Dynamic pricing the price is discovered, not posted

• Bargaining - the price is negotiated deal by deal
• Auctioning - bidders set the price against each other
• Yield management - the price moves with remaining capacity and time
• Real-time market - the price is whatever the market clears at right now

Fixed mechanisms are cheap to run and easy for the customer to understand. Dynamic mechanisms extract more value from each transaction but cost effort per deal and can feel unfair once the customer notices the variation.

8 · Price discrimination in three degrees

Charging different customers different amounts for effectively the same thing is the point of most of the mechanisms above. The classification depends on how much the seller knows about who is in front of them.

First degreea unique price per customer

Negotiated pricesthe price is set individually with each buyer, as in car sales or B2B contracts

Second degreethe seller cannot tell who is who

Let customers sort themselvesuse schemes such as non-linear pricing, or extend the product line so each customer picks the version that matches their willingness to pay

Third degreethe seller can work it out

Price by observable groupthe seller identifies the segment directly or by proxy, and charges different prices by location, identity, time, context and so on

The three degrees in one line: first degree knows the individual, third degree knows the group, and second degree knows nothing and therefore has to design a menu that makes customers reveal themselves.

Second degree is the interesting one for a start-up, because it needs no data about the customer at all. You simply build a small ladder of versions and let the customer’s own choice do the segmenting for you.

9 · Bundling, multi-part tariffs and product-line pricing

Three mechanisms come out of that idea, and all three appear in the session as topics in their own right.

Price bundling the product-feature-dependent branch of fixed pricing: several items are offered together at one combined price instead of being priced individually, so customers who value the individual parts differently still find the package worth buying

Non-linear pricing, or multi-part tariffs the price per unit is not constant: a tariff can combine a fixed access charge with a per-unit charge, or change the per-unit rate as volume rises, which is the classic second-degree scheme

Product line or feature-dependent pricing the same underlying product is offered in several versions with different feature sets at different prices, so the customer self-selects into the tier that matches what they will pay

The session also flags cloud service pricing models as a category of their own, and that is where all three show up at once: an access tier, a metered component, and a feature ladder inside a single price list.

10 · Setting the price: benchmarks, and why the price lever is the strongest

Three benchmarks are named for arriving at the actual number.

Benchmark	The logic	Where it fits
Cost-based pricing	The price is a multiple of the actual product cost, typically set for maximum revenue or profit against volume	Easy to defend internally, but it ignores the customer entirely
Value pricing	The price is based on the value the product delivers rather than on what it cost to make	The right default for a genuinely new offering, and the reason willingness to pay has to be measured
Competitive pricing	The price positions the product against the others in its competitive set	Typically used in existing markets, where a reference price already sits in the customer’s head

The session also carries a 4 C’s of pricing frame and a pricing worksheet. The three benchmarks above are the ones spelled out in words in my notes, so those are what I revise from.

Why this decision carries so much weight. Operating profit is built from a small number of terms, and price appears in only one of them.

Operating profit (price - variable cost per unit) × volume - fixed cost

Effect of a price change change in profit = change in price × volume the whole increase drops through, because no extra unit is produced and no extra cost is incurred

Effect of a volume change change in profit = (price - variable cost) × change in volume only the contribution margin drops through, because each extra unit costs something to serve

Why price wins the price lever beats the volume lever by roughly price ÷ contribution margin, so the thinner the margin, the more dramatic the advantage of price

That is the whole of the impact-of-pricing argument. A one percent price improvement carries no incremental cost with it, whereas a one percent volume improvement carries the cost of serving the extra units and usually the marketing cost of winning them too. Cost reductions sit in between, and they are typically the hardest of the three to actually achieve. The Worked example below puts numbers on this.

11 · Pricing principles, and the Veblen effect

The pricing principles cover the ordinary case and the exception.

The ordinary case is the one everybody assumes: demand slopes downward, so raising the price loses some customers and lowering it wins some, and the job is to find the point where price times quantity, net of cost, is largest.

The exception is the Veblen good, and it is the principle worth remembering precisely because it contradicts that intuition.

Normal goodprice up, perceived value unchanged, demand falls

Veblen goodprice up, perceived value and status signal rise, so demand can rise along with the price

For a Veblen good the price is part of the product. A higher price does not only ration the good, it advertises quality and exclusivity, so cutting the price can destroy the very thing the customer was buying.

The practical lesson for a young venture is less about luxury goods than about signalling. A price set far below the market can read as an admission that the product is not serious, particularly in B2B, where a suspiciously cheap tool raises the question of whether the supplier will still exist next year. Price is one of the loudest quality cues a buyer has when they cannot yet evaluate the product itself.

12 · Measuring willingness to pay

Willingness to pay, or WTP, is the highest amount a customer would still hand over rather than go without. It cannot be read off a cost sheet, so the session gives three families of methods.

Experimentsobserve real behaviour

Price-demand curveprice elasticity of demand: vary the price and record how quantity responds

A/B testingshow different prices to comparable groups and compare the conversion

Surveysask about the price directly

Price sensitivity meterthe Van Westendorp approach, which asks each respondent for four price points instead of one

Conjointinfer the price from choices

Conjoint analysisrecover the willingness to pay for specific features from the trade-offs respondents make between whole offers

Three ways of getting at the same quantity, in decreasing order of realism and increasing order of diagnostic detail.

Method	Strength	Weakness
Experiments	Real money and real decisions, so no stated-preference bias, and A/B testing gives a direct read on conversion at each price	You need live traffic and something to sell, only a few price points can be tested, and charging comparable customers different prices raises fairness questions
Surveys	Cheap and fast, works before the product exists, and the four-question price sensitivity meter yields a whole acceptable range rather than a single number	Respondents are spending imaginary money, so answers run optimistic, and the method prices the offer as a whole while saying nothing about which features earned it
Conjoint	Gives willingness to pay for individual features, which is exactly what a product-line or bundling decision needs, and the trade-off format is far harder to game than a direct price question	The most work to design and analyse, needs a decent sample, and the attribute list has to be right in advance

This is the direct link back to the conjoint analysis chapter. Conjoint is not a separate topic that happens to sit near pricing; it is the pricing tool that answers the feature-level question, which is precisely the question raised by product-line pricing and bundling in section 9. The sensible sequence is conjoint to decide what goes in which tier, then a survey to bracket the range, then an experiment to settle the number.

Case corner

PassionConnect is a Bangalore start-up founded in 2013 by three co-founders, built to help Indians discover and pursue passions that social pressure toward conventional careers tends to suppress. It began as a psychometric test for identifying a passion and grew into a platform organised around three steps: identify, through tests, curated articles, blogs, quizzes, polls and videos; nurture, by sharing the passion with buddies and being mentored by experts who have built careers out of theirs; and live, through mentor access, organised events, meet-ups and internships. It focuses on a limited set of areas including travel, food, fitness, music, technology, dance and photography. By early 2017 it had roughly 40,000 registered users, over 100,000 unique monthly page views, more than 3,000 daily visitors and 313,000 Facebook likes, a team of twelve alongside the founders, and no revenue at all. The pressure is external: with Indian venture capitalists shifting their attention from users and growth toward sales and profit, a Series A cannot be raised on user numbers alone, so a monetisation strategy has to exist before the round.

Which revenue model fits, and why. The options the founders identified map straight onto the taxonomy: a subscription fee and a freemium tier are title-stays-with-seller access models; the e-commerce store is an asset sale; the mentorship marketplace, and transaction fees on events and class sign-ups, are brokerage; and display advertising and sponsored content are advertising fees. Judged against the criteria in section 6, the pure subscription fails badly on impact on user growth and impact on user experience, because the platform has always been free, and putting a wall in front of an unmonetised base would stall the growth that is currently the company’s only real asset. The e-commerce store fails on feasibility and required investment, since it means inventory, logistics and a radical shift in the business model for a lean team of fifteen. My choice is a combination: freemium as the consumer-facing core, so the free tier keeps compounding the base while a premium tier monetises the committed minority, layered with a brokerage fee on the mentorship marketplace and on event and class sign-ups, taken as a percentage of transaction value. That pairing scores well on the criteria that matter here, because it earns before it spends, it does not slow growth, it scales with new users, and both halves are aligned with the stated vision of helping people live their passion rather than working against it. Advertising and sponsored content I would keep as ancillary revenue only: the niche, interest-declared user base is genuinely attractive to advertisers, but banner inventory taxes exactly the user experience the platform is selling. Of the two, sponsored content is the better fit, being less disruptive and more relevant, at the cost of more partner work.

The pricing mechanism. Fixed, product-line and feature-dependent pricing for the freemium ladder, which is second-degree price discrimination: the team cannot tell a casual browser from a serious hobbyist, so it builds two or three tiers and lets users sort themselves. The premium tier should hold the features tied to the live step, where the value is most visible, with the identify content staying free so acquisition is untouched. For the marketplace, a percentage of transaction value rather than a flat fee, so the cut scales with the mentor’s own price and a musician charging a modest amount for a half-hour session is not deterred, and no listing fee while supply is still being built.

Measuring willingness to pay. Three steps in sequence. First a conjoint study on a sample of registered users, with the candidate premium features as attributes and price as one of them, to find which features actually carry value and therefore belong behind the wall - this answers the founders’ own open question about which features would be compelling enough to pay for. Then a Van Westendorp survey on the resulting premium bundle, run against the existing user base, to bracket an acceptable monthly range. Then a live A/B test of two prices inside that range on the sign-up page, measuring the number that actually decides the business: the conversion rate from free users into paying ones. The same conjoint output also indicates what percentage commission mentors and event partners will tolerate before they route around the platform.

Worked example

A small B2B SaaS venture. Baseline month: price 40 euro per subscription, 2,500 subscriptions, variable cost 16 euro per subscription, fixed cost 45,000 euro.

Baseline (40 - 16) × 2,500 - 45,000 = 60,000 - 45,000 = 15,000 euro operating profit

Contribution margin 40 - 16 = 24 euro per unit, which is 60 percent of the price

Price leverage over volume 40 ÷ 24 = 1.67 so a price improvement is worth about two thirds more than the same percentage improvement in volume

Now apply the same 5 percent improvement to each lever, one at a time.

Lever moved by 5 percent	Revenue	Variable cost	Fixed cost	Operating profit	Change	Change in percent
Baseline	100,000	40,000	45,000	15,000	-	-
Price up to 42.00	105,000	40,000	45,000	20,000	+5,000	+33.3
Volume up to 2,625	105,000	42,000	45,000	18,000	+3,000	+20.0
Fixed cost down to 42,750	100,000	40,000	42,750	17,250	+2,250	+15.0
Variable cost down to 15.20	100,000	38,000	45,000	17,000	+2,000	+13.3

The ranking is the point. The identical five percent of effort produces a third more profit through price and only an eighth more through variable cost. Price wins because the extra 2 euro per subscription costs nothing to produce, while the extra 125 subscriptions each cost 16 euro to serve before they contribute anything, and that is before counting what it cost in marketing to win them.

Sketching the willingness-to-pay survey. A price sensitivity meter asks each respondent four questions about the same offer: at what monthly price would it be so cheap that you would doubt the quality, at what price would it be a bargain, at what price does it start to feel expensive but still worth considering, and at what price is it so expensive that you would not consider it at all. Cumulating the answers across 200 respondents gives four curves, shown here as the percentage of respondents at each price point.

Monthly price	Too cheap to trust	A bargain	Getting expensive	Too expensive
20	55	78	8	2
30	30	62	20	6
40	12	44	38	18
50	4	26	58	38
60	1	11	76	62

Reading off the crossings: too cheap and too expensive cross between 30 and 40, at roughly 37 euro, the point where the fewest people reject the price in either direction. Bargain and getting expensive cross between 40 and 50, at roughly 42 euro. So the indicative acceptable band runs from the middle thirties to about fifty, and a sensible launch price is around 39 euro, close to the current 40. Given the leverage table above, the very next experiment is an A/B test of 39 against 44 on live sign-ups, because if the higher price holds conversion it is worth more than a campaign chasing five percent more users.

Apply it to your project

1. Write down what the customer is actually buying. Ownership of a thing, metered consumption, time-based access, exclusive use of an asset for a period, a right to use IP, or a connection to somebody else. That one sentence is your revenue model, and everything below depends on it.

2. List two or three candidate models, not one. Include at least one from a different family, so an asset sale is tested against a subscription, or a direct charge against a brokerage cut. Add the free variants wherever a cross-subsidy is plausible.

3. Score each candidate against the three criteria families. Financial: predictability, cash-flow cycle, profit potential, fixed versus variable cost, acquisition cost. Users: experience, growth, scalability, conversion. Feasibility: alignment with your goals and value proposition, investment to launch, fit with what you already do. Kill any model that fails the cash-flow cycle or slows user growth.

4. Choose the mechanism your model allows. Fixed list price, bundle, multi-tier by segment, or volume-dependent; or a dynamic mechanism if your capacity is perishable or your market genuinely clears in real time. If you cannot identify who is in front of you, design a second-degree ladder and let customers sort themselves.

5. Run a conjoint study to decide what sits in each tier. Price is one of the attributes. The output tells you which features people will actually pay for, and therefore what belongs behind the paywall.

6. Bracket the range with a price sensitivity survey. Four questions per respondent, on the specific bundle from step 5, run on your target segment. Read off the crossing points to get an acceptable band, not a single number.

7. Sanity-check the band against the three benchmarks. What does it cost you, what value does it deliver, and what do the alternatives in the customer’s competitive set charge. If the value-based number sits far above the cost-based one, that gap is your business.

8. Do not price yourself into looking cheap. Check whether your buyer uses price as a quality signal before setting a low anchor, because in that case a higher price can raise perceived value rather than lower demand.

9. Test the number live with an A/B test, then build the leverage table for your own venture so you can see, in your own numbers, what one percent on price is worth against one percent on volume. Diarise a price review, because this is the lever you will otherwise never touch again.

Key terms

Term	What it means in plain words
Revenue model	The what: the strategy a business uses to generate cash from its customers
Pricing mechanism	The how: the tactics used to arrive at a price with customers
Setting the price	The how much: putting an actual number on the offer
Asset sale	The buyer pays, the seller hands over the goods, and title passes to the buyer, who then owns them
Usage-based fee	The buyer consumes a service and pays in proportion to how much is consumed, as with telephone minutes
Subscription fee	The buyer pays for time-based access to a service, as with a gym membership or streaming
Renting	The buyer pays for temporary exclusive access to a specific asset, as with office or car rental
Licensing	The buyer pays for the right to use intellectual property the seller owns, as with media rights
Brokerage fee	A fee for connecting two or more parties, as charged by real estate agents or card issuers
Advertising fee	A fee for providing and promoting access to a prospective buyer base
Ancillary revenue	Money earned from traffic, referrals, affiliate commissions, list rentals or back-end offers rather than from the core transaction
Freemium	A free basic service with a charged premium version, one of the free-model variants alongside charity, multi-sided platforms, open source and bait and hook
Price discrimination	Charging different prices for effectively the same thing: first degree per individual, second degree by self-selection, third degree by identifiable group
Price bundling	Offering several items together at one combined price instead of pricing each of them separately
Non-linear pricing	A tariff where the price per unit is not constant, for example a fixed access charge plus a per-unit charge
Value pricing	Setting the price from the value delivered to the customer rather than from what the product cost to make
Veblen good	A good whose higher price raises perceived value and status, so demand can rise as the price rises
Willingness to pay	The most a customer would pay rather than go without, measured through experiments, surveys or conjoint

Test yourself

1. State the three levels of the pricing question in order, and say in one line what each one decides.
2. Sort these into title-passes-to-buyer, title-stays-with-seller, and middleman: car rental, a card issuer’s fee, buying a laptop, media rights, telephone minutes, a streaming subscription.
3. Name the three families of criteria for choosing a revenue model and give two criteria from each.
4. A seller cannot tell which customers value the product highly and which do not. Which degree of price discrimination is that, and what is the standard way of handling it?
5. Calculation. A venture sells at 25 euro per unit, sells 4,000 units, has a variable cost of 10 euro per unit and fixed costs of 40,000 euro. Work out the operating profit, then the profit after a 4 percent price increase and after a 4 percent volume increase. Which lever is stronger, and by how much?
6. Give the three families of methods for measuring willingness to pay, with one strength and one weakness each, and say which one you would use to decide what goes into a premium tier.

Answers

1. Revenue model is the what: the strategy used to generate cash from customers. Pricing mechanism is the how: the tactics used to set the price with customers. Setting the price is the how much: putting the actual number on it. They are decided in that order, because each one narrows the next.
2. Title passes to the buyer: buying a laptop (asset sale). Title stays with the seller: car rental (renting), media rights (licensing), telephone minutes (usage-based fee), a streaming subscription (subscription fee). Middleman: a card issuer’s fee (brokerage).
3. Financial - predictability of revenues, positive cash flow cycle, profit potential, fixed versus variable cost, customer acquisition cost. Users and customers - impact on user experience, impact on user growth, scalability with new users, conversion rate into paying users. Feasibility - alignment with founder goals and the value proposition, required investment to launch, integration with current business activities.
4. Second degree. The standard handling is to make customers reveal themselves: use non-linear pricing, or extend the product line into versions or tiers so each customer picks the one matching their own willingness to pay.
5. Baseline profit is (25 - 10) × 4,000 - 40,000 = 60,000 - 40,000 = 20,000 euro. A 4 percent price rise takes the price to 26 euro, so profit becomes (26 - 10) × 4,000 - 40,000 = 64,000 - 40,000 = 24,000 euro, a gain of 4,000 or 20 percent. A 4 percent volume rise takes units to 4,160, so profit becomes 15 × 4,160 - 40,000 = 62,400 - 40,000 = 22,400 euro, a gain of 2,400 or 12 percent. Price is the stronger lever, worth 4,000 against 2,400, a ratio of about 1.67, which is exactly price divided by contribution margin, 25 ÷ 15.
6. Experiments (price-demand curve, A/B testing) - strength: real behaviour with real money; weakness: needs live traffic and only a few price points can be tried. Surveys (the price sensitivity meter, Van Westendorp) - strength: cheap, fast and possible before the product exists; weakness: respondents spend imaginary money and it says nothing about individual features. Conjoint analysis - strength: gives willingness to pay for specific features and is hard to game; weakness: most effort to design and analyse. To decide what goes into a premium tier I would use conjoint, because it is the only one of the three that prices features rather than the whole offer.

Revision summary

Tip

The one-minute recap

• Three levels, in order: revenue model = what (the strategy used to generate cash from customers), pricing mechanism = how (the tactics used to set the price with customers), setting the price = how much (putting a price tag on it).
• Title passes to the buyer in an asset sale. Title stays with the seller in a usage-based fee (telephone minutes), a subscription fee (gym, streaming), renting (office, car) and licensing (media rights). The middleman models are the brokerage fee (real estate, card issuers) and the advertising fee (access to a prospective buyer base).
• Ancillary models: referral revenue, affiliate finder’s fees, e-mail list rentals and back-end offers. Free models: charity, multi-sided platforms, freemium, open source, and bait and hook or razor and blades.
• Criteria: financial (predictability, earn before you spend, profit potential, fixed versus variable cost, acquisition cost), users (experience, growth, scalability, conversion), feasibility (alignment, investment, fit).
• Mechanisms: fixed (list price, bundling, multi-tier, volume-dependent) versus dynamic (bargaining, auctioning, yield management, real-time market). Price discrimination: first degree per customer by negotiation, second degree by self-selection through non-linear pricing or a product line, third degree by identifiable group using location, identity, time or context.
• Benchmarks for the number: cost-based, value-based, competitive. Price is the strongest lever on profit, because a price rise carries no extra unit cost while a volume rise contributes only its margin: the advantage is roughly price divided by contribution margin.
• Veblen goods invert the usual rule: a higher price raises perceived value and can raise demand, so pricing low can destroy the signal the customer was buying.
• Measuring willingness to pay: experiments (price-demand curve, A/B tests) are realistic but need live traffic; surveys (price sensitivity meter, Van Westendorp) are cheap but spend imaginary money; conjoint is the one that prices individual features, which is what tiering and bundling actually need.

Next: Managing Customer Growth → - from first customers to a growth engine.