Editor’s note: At LeveragePoint, the concept of value-based pricing is important to every member of the company. In this blog post, one of LeveragePoint’s software developers, Aaron Williams, outlines his experience using value-based pricing during his time as the CEO of a ride-sharing company.
Winter is coming
In December 2012, I was living a dream. I was CEO and cofounder of Rootless, a ride-sharing company. People were using our site to travel to music festivals together and meet cool people along the way. However, dreams aren’t without challenges, and winter was coming.
The colder weather meant festival season had ended. Festival goers were not going to return to our site for a few months. A large drop in usage does not fit the hockey stick shape a CEO wants to show investors. To make matters worse, the end of our cash runway was in sight and rapidly approaching. We had to find a new market fast, and generate revenue even faster.
Identifying a new market
After looking at all of our options, we determined organizing carpools to ski resorts was our best option for our winter survival. We chose ski resorts based on the following criteria:
– Was there demand? Were people already arranging carpools using a less efficient system?
– Could our current system be repurposed quickly for the new market?
– Could we reach the potential users?
– Was our service better than the alternatives?
– Would anybody pay us for the service?
However, there was an unexpected twist when we started looking at our value proposition to answer the final question, “Would anybody pay for our service?”
While building value propositions to answer the question about who would pay, we came to an important realization. Our service was valuable to skiers, but it was much more valuable to the resorts.
Value for skiers:
– Reduced cost of owning a snow ready vehicle
– Reduced gas costs
– Meet new people (no quantifiable value but an important benefit)
Value for ski resorts:
– Increased lift ticket revenue
– Increased rental revenue
– Increased concession revenue
– Increased bar revenue
– Increased lodging revenue
Now we knew we would be charging the ski resorts for the service. The question became, “how much?”
Choosing a price
Choosing a price was a heated debate. Our team agreed that we did not have enough market proof to charge ski resorts an upfront fee. Instead, we were going to charge a commission for each person delivered to the resort. The debate centered on the size of the commissions. We settled on three main options. The choices and their inspiration were:
– Free. Our partnerships with music festivals were free and there is no barrier to adoption.
– $2 per person. This was a random choice we felt would avoid pushback from the resorts.
– 20% of a lift ticket ($8-$20 per person depending on the resort). This was based on the amount of additional value a person at the resort represents.
Our team was split on the last two options.The free option was a last resort and was not debated. The team was split because some people were worried about customer response to the larger commission rate. We decided to test the largest commission rate during the sales calls we had scheduled with several ski resorts.
Getting price feedback
For the first sales call we committed to trying the larger commission rate. When the topic of price came up, my coworker gave me a nervous smile and nod. I stated the price was 20% of a lift ticket. I then explained the additional value a person on the resort represents beyond a lift ticket. To our delight, the person on the call accepted the commission rate without hesitation. The call continued and a proposal was sent. We were thrilled with the result of the call and the pattern continued. Of the next five calls, only one pushed back on the commission rate after we explained the value proposition. Our pricing model was a success. We were providing enough value to ski resorts that they were willing to pay us a sizable percentage of a lift ticket to bring people to their mountain. The last challenge in front of us remained closing the deals.
Closing the deal
Unluckily for us, the most eager customer was the ski resort who pushed back on our pricing. The resort manager explained they were a discount ski resort who regularly ran promotions. He worried their margins were not large enough to support the prices we were quoting. After a little back and forth it was determined we would follow up with a new price that would meet his needs.
As a team we came up with three new pricing options.
– 15% of total value of the customer
– 20% of the price of a lift ticket
– $7 fixed price
Our goal was to get the fixed price. The other two options were included as possibilities in case the resort manager wanted to change our assumptions about his business.
To explain the prices I sent a spreadsheet with a simple value proposition. There were highlighted fields with our assumptions about his business. He was free to change any of the highlighted values and choose from the three price options. The spreadsheet looked like this:
Shortly after sending the value proposition via email, we received a reply choosing the fixed price option of $7 per person. The email also contained a purchase order number. We had closed our first revenue generating partnership!
Value-based pricing was critical for Rootless’ transition into the ski resort ride-sharing market. The value models we created helped identify a new market, determine a fair price, and close deals. Our experience with value-based pricing provided a great learning opportunity and demonstrated the importance of providing and capturing value. While our company was not successful in the long term, we survived the winter.
About the Author
Aaron Williams is a software developer for LeveragePoint. Previously he was the CEO and co-founder of a ride-sharing startup, Rootless, Inc and a software engineer for Cisco Systems. He is passionate about new technology, startups, and traveling. Mr. Williams holds a BS in Electrical and Computer Engineering from The Ohio State University.