In this blog, we finally talk about the last of the six P’s which is ‘Price‘.
“Price is what you pay. Value is what you get.”Warren Buffet
‘Pricing‘ is oftentimes overlooked as a strategic tool of a company. However, if properly deployed, it could be a powerful strategic pillar that could truly drive growth and profitability.
There are four traditional views on pricing strategy which include the following:
- “I want people to try my product or service as quickly as possible to help my business establish my customer base.” This is called ‘market penetration‘ pricing. This type of pricing strategy undercuts competitors and expedites trial of the product as soon as possible. Several factors go into deciding on this strategy, including your business’s ability to potentially take losses up front to establish a strong footing in a market. Cebu Pacific’s ‘Piso Fare‘ campaign comes to mind in this type of pricing.
- “I want to be able to cover my cost and earn a small mark-up so I can sell large volumes of my product.” This is referred to as ‘cost-plus‘ pricing. This is usually used when doing business with commodities, undifferentiated products or services, and generic products and services but entail large quantities or volume of transactions. Pricing in rice trading companies is an example of this.
- “I want to sell my product at a certain percent above the cost of making the product or fulfilling the service.” This is also known as ‘gross-margin’ pricing. Most branded products and services use this pricing strategy. Brands that compete with similar products and services usually level off to a certain pricing level, but remain higher than generic products since these brands are able to offer a discernible difference or value. When properly differentiated, brands can fetch healthy margins, and are mainly tempered by competitive pressures from similarly perceived brands. That’s why Haagen Daz® ice cream can price itself at 400% higher versus a mass-market ice cream brand like Selecta® because of its premium positioning supported by premium flavors and ingredients (i.e. Belgian chocolate, cream, pasteurized eggs, etc.). But perhaps, an 800% price difference may begin to alienate potential consumers. So there are thresholds.
- “I want to sell my product or service based on its perceived value.“ This is referred to as ‘value‘ pricing. This is commonly used by premium, luxury, limited or exclusive products and services. The buyer is usually prevailed upon more by his or her emotions rather than rational and objective thought. This partly explains why a Japanese teenager would shell out thousands of dollars for a pair of rare Nike® dancing shoes. Or why someone would pay over a US$1million for a Cartier® watch. So the thresholds in this type of pricing strategy tend to be exponentially higher because of the nature of the brand.
From the above, we can see the pricing strategy of a brand depends on the nature of the product or service, as well as the competitive landscape.
Some brands can use a combination of these strategies, especially if the brand has multi-tier product or service offerings. For example, most airlines have Economy, Business and First Class pricing strategies.
But of course, just like all the other P’s, a brand’s pricing strategy is not a stand-alone strategy. It must work cohesively with the other P’s in order for it to contribute its full potential as a part of the whole marketing mix.
Following the message of Warren Buffet in our quote above, if the perceived value that you receive or experience from a brand is above the price that you paid, then you will likely end-up a very satisfied customer, and you will want more. And of course, the same is true the other way around. If the perceived value you received is below the price that you paid, then you will likely not purchase that product or service again.
In this blog, we focus on the pricing strategy of a brilliant brand which has become as ubiquitous as the COVID-19 virus which caused this brand to become so viral (pun intended).
I am referring to the video-conferencing brand Zoom.
Zoom has actually been around for 10 years already. It was launched in 2011 when its founder Eric S. Yuan, who immigrated to the US from China in 1997 (and spoke very little English at that time), left Cisco as its founding engineer of the WebEx video platform, one of Zoom’s direct competitors. He left after the Cisco management rejected his pitch for a smartphone-friendly video conferencing system. He decided to set-up his own company Zoom Video Communications. Eric always talked about “how unhappy” people were with the videoconference tools on the market. So he went about building his own company.
As fate would have it, by early 2020, the COVID-19 global pandemic catapulted the brand into stratospheric heights and accelerated its growth in a very short period of time.
According to data gathered by Learnbonds.com, during the 30-day period February 22 to March 22, 2020, Zoom was downloaded a total of 17,190,100 times, almost equally split between iOS and Android versions. On March 22 alone, the total number of downloads was just below two million within only 24 hours, compared to only 144,800 just 30 days earlier on February 22. On March 23, just one day after the period covered by the study, Zoom was downloaded 2.13 million times! It would be remembered that it was during this period when most employees globally were being asked to work from home. Zoom became the top free downloaded app in Apple’s app store during that period.
So how did Zoom do it?
Part of the answer lies in its pricing strategy, among other key factors related to its product design.
In the case of Zoom, they employed a combination of mainly the first and third pricing strategies, i.e. market penetration pricing and gross margin pricing. Zoom went for widespread trial, thus employed an aggressive market penetration pricing strategy. But at the same time, the brand offered a discernible value, therefore, was able to establish other more profitable pricing tiers while remaining modest.
“Free. Forever. No credit card required.”Zoom’s Basic Plan
Zoom’s Basic Plan is priced at zero. ‘Free. Forever. No credit card required.’ as stated in their ‘Choose a plan‘ page. This brilliant strategy is the virtual equivalent of Kopiko Brown®‘s sampling campaign when it deployed promotions teams to conduct sampling to shoppers in supermarkets and other high-traffic locations during the brand’s launch phase in the Philippines. And since Kopiko® positioned its product as a superior experience to Nestlé’s Original 3-in-1, they were confident that once a consumer was able to try the product, they will be asking and paying for more. In a few years, Kopiko® would grab market leadership from Nestlé.
It’s the same thing with Zoom.
When the COVID-19 pandemic surged in late 2019 to early 2020 and forced social distancing, Zoom was the only brand which offered this kind of free Basic Plan. And since the product was designed for a much easier user experience vis-a-vis the video-conferencing brands used by corporations like Cisco’s WebEx, Microsoft Teams, and Google Meet, Zoom was able to capitalize on the sudden market need especially amongst students, teachers and parents. Soon, even church services, museum tours, theater shows, ballet classes and more were happening in Zoom. As the New York Times put it: “We live in Zoom now.”
With the Basic Plan, given its zero pricing and ease of use (i.e. no need for log-in, etc.), Zoom was able to make millions of new customers experience the user-friendly service immediately.
And because Zoom is an SaaS (or Software as a Service) platform, the cost of developing and setting up the platform is already a sunk cost. Therefore, offering people a free but limited access to Zoom does not hurt the bottomline of the company, but rather, provides them a cost-neutral way of quickly driving trial for the service.
The Basic Plan’s 40-minute limit for meetings with three or more people was also a clever move by the brand to encourage professional and small to medium-sized business users to start subscribing to a paid plan in order to provide an even better experience for their internal teams, business partners and external customers. Based on my own experience, forty minutes was long enough to experience the service, but usually too short to conduct meetings with customers, colleagues and catch up with friends.
As @namtrok said in an online forum Capiche about Zoom early in 2020: ‘I know money is money, and this could be bad logic used to justify loads of SaaS subscriptions when there are free alternatives, but as I look at it at $15/month or $180/year I only have to work 1-2 hours/year to pay for this service and it dramatically increases my clients and potential clients’ experience.’ Another user @awwstn chimed in the forum, “the modest cost for Zoom is a very small price to pay for something that works reliably and as expected, every time.” Therefore, after getting users hooked on the user-friendly experience and reliability of Zoom, the brand offered very modest pricing tiers which are relatively low barriers to entry in gaining access to more advanced features of the service. It’s also quite embarrassing and unprofessional to have to tell customers to log-in again after the free forty minutes have expired.
“Work is no longer a place, it’s a space where Zoom serves to empower your teams to connect and bring their best ideas to life.”Eric S. Yuan, Founder and CEO of Zoom
Zoom’s campaign was so successful that its closest competitor Google Meet (formerly known as Google Hangouts) was forced to offer a one-hour plan also for free starting in April 2020, a few months behind Zoom. However, it could be argued that this was already too late for Google Meet since by that time, tens of millions of users had already downloaded Zoom and have had a high-value experience from the brand for free. That’s hard to beat.
And since millions of users ranging from grade schoolers to grand parents in their 70’s and 80’s were already in Zoom, the brand was unstoppable.
By the end of its fiscal year in January 31, 2021, the revenues of Zoom had skyrocketed to US$2.65Billion compared to only US$623Million during the prior fiscal year. Profits increased to US$627Million compared to only US$22Million in the previous year, or a 2800% increase in profits. As a result, by June 2, 2021, the brand’s market capitalization had more than doubled to a whopping US$96Billion.
Clearly, Zoom’s pricing strategy, among other things, was key in enabling this brilliant brand to achieve such incredible results in such a short period of time.
Of course, it helped that its brand identity was perfect for the times. The brand name became a verb which also developed into some endearing terms like ‘Zinuman‘ (virtual drinking session), ‘Zoom Happy Hour‘, ‘Zoomba Sessions‘ and more.
This brilliant brand teaches us three key lessons about pricing strategy:
- First, pricing strategy can be a powerful tool in penetrating and leading in a new market segment (i.e. teachers, students, professionals, etc.).
- Second, with cost structures in check, aggressive market penetrating pricing strategies can eventually lead to sustained profitability for a business.
- And third, pricing strategy can be a combination of tactics in order to drive customer trial, loyalty and profitability (i.e. multi-tier pricing, etc.).
You can indicate your reason for choosing ‘No‘ here.