The Price Is Right: A Quest for Fairness and Simplicity

In a world marked by high inflation rates, governments are engaged in a race to find ways to compensate citizens for their diminishing purchasing power. Simultaneously, businesses are navigating a complex landscape, searching for strategies to sustain their revenue streams by increasing prices without alienating their customer base.

This conundrum has sparked a wave of innovation in different (pricing) models. Pricing models influence not only the cost of products and services, but also the tax rates imposed by governments and the support premiums and reductions granted by governments to both companies and citizens.

Striking the right balance within these models is imperative, requiring a delicate compromise between several crucial factors:

• Fairness: Both customers and citizens must perceive the pricing model as just and equitable. There should be a sense that the price aligns with market norms and does not unfairly treat individuals compared to their peers. Unfair pricing practices can erode trust and brand loyalty, ultimately harming businesses in the long run.

• Complexity and Transparency: The pricing model should be easily comprehensible for everyone. When customers can effortlessly grasp pricing, it reduces frustration and facilitates their purchasing decisions. Subscription-based services, for instance, offer a straightforward monthly fee that covers all expenses. However, achieving simplicity is not always straightforward. Certain industries, like airlines and healthcare providers have implemented pricing structures driven by numerous variables.

• Ease of Implementation: The IT systems should be capable of supporting and setting up the pricing model in a cost-efficient manner.

• Long-Term Sustainability: Ideally, the pricing model should remain relevant without the need for frequent adjustments, especially due to inflation. Automatic indexation can be integrated into the model as long as it is transparent to end-users.

• Commercial Viability: The pricing model should generate sufficient revenue or, in the case of subsidies, not impose excessive costs.

There exist various pricing models, each with their own advantages and drawbacks, i.e.

• Upfront Price: This model defines the price at the point of acquisition or contract signing. It can take several forms, i.e.

  • Fixed Price, i.e. the price of a product or service is fixed and independent of any conditions (like the customer, the acquisition moment and place…​). A typical example are the products in a supermarket at a given moment in time (although they do vary also strongly over time).
    Obviously a product or service can be modularized, allowing to define a complex pricing catalogue, in which the user can compose the product or service of different modules and calculate as such the total price. A typical example of this is a car, where the consumer can compose the car with different packs and options.

  • Dynamic Price, i.e. in this scenario prices fluctuate based on various criteria such as customer segmentation, cross-selling, timing, location, user search history…​ The most known example of this type of pricing is obviously the hotel and airline sector, where prices for the same room or seat can be very different depending on all those conditions.

• Volume-based pricing: in this type of pricing, the amount paid for a service or product will depend on the volume being acquired. The volume can be very diverse, i.e. the weight of the product, the number of (total, active or concurrent) users, the amount (e.g. transaction amount, salary amount…​), the number of CPU cycles or Gigabytes transferred/stored…​ Obviously the exact definition of the "volume" is critical and can spark a lot of discussion if not carefully defined. For example, a PSP processing payments for a webshop might ask X EUR per transaction. In this case the volume is the "number of transactions", but this is clearly too vague: Is a transaction only a successful transaction or also a failed transaction? Are test transactions included or not? If 1 payment is completed via 2 payment methods, does this count as 1 or 2? Is a retry counted or not? What about refunds? …​
  Once the volume definition is clear, there are a number of options to define the pricing:

  • Fixed price per volume unit. A typical example is a SaaS platform charging X EUR / user / month.

  • Dynamic price per volume unit. A good example are Cloud providers, which can have very variable prices per customer segment, per availability zone, sometimes even based on timing (i.e. less expensive during non-peak hours).

  • Percentage based (if the volume unit is an amount). Example are PSPs charging a percentage of the payment amount as cost or government taxes.

  • Staffel pricing, i.e. a number of staffels are defined with a different price per staffel or percentage for each staffel. The Belgian income taxes are typically defined via a staffel pricing based on the taxable income, with different tax percentages per staffel.
    When working with staffels, it is important to define the calculation method. E.g. is the entire volume charged with current staffel or is the volume split between the different staffels? Is the real volume used for calculation or is the staffel threshold used for the calculation? …​

  • Any combination of the above is of course also possible.

  • Additionally all those volume-based pricing models can be accompanied with a minimum (floor) or maximum (cap) to compensate for too small or too big resulting prices.

Effective pricing strategies often incorporate psychological techniques drawn from years of research, e.g.

• Charm Pricing: Prices ending in 9.99 EUR are perceived as less costly than rounded figures like 10 EUR.

• Odd-Even pricing: Items ending in odd numbers are purchased more frequently than those ending in even numbers.

• Discounts and Freebies (e.g. Buy One, Get One Free). Companies often adjust their initial prices to offer discounts or free add-ons. This means companies already adjust their starting price to offer the discount or to offer certain additional product/modules/services for free. Usually discounts are granted on immediate costs (e.g. set-up costs and implementation costs), as they give an immediate benefit to the customer, while these discounts cost considerably less than giving discounts on recurring revenues.

• Companies will often issue products in 3 models with 3 different prices (cfr. most SaaS offerings). Usually the cheapest and most expensive one exist for boosting the sales of the middle-priced product.
  Or in some cases also decoy pricing is used, were again 3 models are showed, with the most expensive one only a little more expensive than the middle one. In this case, people tend to buy the most expensive one, much more than the cheapest one. The middle one is almost never sold, as it acts as a decoy for selling the most expensive one.

• Price Appearance: The visual presentation of a price can also have an impact, e.g. EUR 12.00 is considered more expensive than EUR 12 and just "12" is considered even less expensive. In general the "lighter" the number, the less expensive the customer perceives the price.
  Similarly it is better not to put a decimal separator in a price or show the discounted price in a slightly smaller font size than the original price, as this enforces the feeling it is a smaller price.
  Some studies indicate even that the length of the words of the price (when said out lout) has an impact. The shorter the number sounds, the lower the price is perceived.

For businesses other considerations come into play when determining the right price:

• Access to Capital: some companies have a lot of cash or have access to cheap cash. Those companies will be open to pay more upfront, if they can reduce recurring costs later. Other companies, with limited cash, will want to spread the costs as much as possible over time. This is often exploited in SaaS businesses offering an additional discount when the subscription is paid annually.

• Growth cycle: High-growth companies seek long-term pricing stability to ensure their growth trajectory remains predictable.

• Fiscal year budget and results: as companies work with fiscal years and budgets, it can sometimes be important to have maximum of the cost still in the current fiscal year or the opposite move all costs to the next fiscal year.

To grasp the complexities and trade-offs inherent in pricing models, let us examine a few real-life examples:

• Notary Costs in Belgium: These are calculated using a staffel pricing system imposed by the government and based on the house’s purchasing price. However, the low staffel thresholds mean that many houses fall into the highest cost bracket, sparking questions about fairness.
  E.g. a house of 150.000 EUR has a notary cost of 1.655 EUR, a house of 250.000 EUR a cost of 2.140 EUR and a house of 500.000 EUR a cost of 2.890 EUR. The question now is if it is fair that someone buying a house of 500.000 EUR is only paying a bit more in notary costs than someone buying a house for half the price. On the one hand, clearly not, but you could also argue that the effort for the notary is almost identical for the 2 houses.

• Payment Transaction Costs: Payment providers employ various pricing models, such as fixed commissions, pure percentage-based fees, or percentage-based fees with minimum and maximum thresholds. Each model has its trade-offs in terms of simplicity and fairness.
  A fixed commission of e.g. 6 cents per transaction, is very transparent and easy, but gives of course an advantage to stores with high average transaction amounts. A percentage-based approach seems fairer for the merchant, as 2 merchants collecting the same amount of money will pay the same commission, but as the payment provider has a fixed internal cost per transaction, the payment provider will have a considerably higher cost on merchants with a lot of small transactions. The combination of a percentage-based with floor and cap gives a good compromise but increases the complexity (e.g. for the merchant to check if the total monthly commission is correct).

• Government Support: several government support systems provide a fixed amount or percentage-based amount as of a specific wage threshold. This means above this threshold you do not get anything, while below the threshold you are eligible to receive support. This type of model is very easy, but has the counterproductive effect, as staying just below the threshold gives a better outcome than being just above the threshold, which is the opposite of what the government wants to accomplish.

• Commission of a real estate agent. Typically real estate agents in Belgium charge a commission of 3 to 4%. This seems a good pricing strategy, as at first sight it aligns the objectives of the seller and the real estate agent, i.e. sell at the highest price.
  In practice however, this is not always the case. Suppose a commission of 3% and a house of 300.000 EUR. Let’s say this house can be sold in 1 month at this price, which means real estate agent has a commission of 9.000 EUR. Imagine now that if you take 3 months, you could sell it at 330.000 EUR. Probably as a seller, you would like to go for that second option, but as a real estate agent, the second scenario only delivers 900 EUR extra for 2 additional months of work. In order to align the 2 parties, it would be better to work for example with a staffel pricing of 2% for first 200.000 EUR, 4% for next 100.000 EUR and 10% on all the above. In the first scenario, the real estate agent would gain 8.000 EUR, but in the second scenario the agent would gain 11.000 EUR, making it worthwhile for the real estate agent to go for the second option. But you can also imagine, that this much more complex pricing strategy is much harder to sell to a customer, even though it would be in the seller’s best interest.

• Pricing Models of Belgian SaaS Companies: Various SaaS companies adopt different pricing models, including fixed monthly/user pricing, and volume-based pricing, often with discounts for annual payments, e.g.

  • Odoo has a simple standard pricing of EUR 24.90 per user when paid monthly. When paid annually, you pay EUR 19.90 per user per month, meaning a discount of about 25%.

  • Cumul.io: they have chosen foramodelof3 fixed-prices, i.e. a basic package at 950 EUR/month, a professional at 1.950 EUR/month and an elite package at 2.950 EUR/month, with all of them paid on an annual basis.

  • Deliverect: they also work with a model of 3 fixed-prices, i.e. small at 79 EUR/month, medium at 119 EUR/month and large at 199 EUR/month. Additionally to the monthly cost, they also have a setup cost.

  • Yuki: they work with a combination of fixed-monthly price per user, with a volume-based price based on number of administered company numbers, i.e. a fixed-price of 375 EUR per month for the access to the portal and 9 EUR per month for each administered company number.

  • Teamleader: for companies with up to 20 employees, Teamleader proposes also 3 fixed-prices, i.e. Go at 60 EUR/month, Move at 78 EUR/month and Boost at 99 EUR/month with quarterly invoicing. When paid annually, a discount of about 20% is given. Interesting here is that these models include 2 users, but the pricing model is then volume-based per user, when adding more users (respectively 25, 33 and 45 EUR/month/extra user).

The above examples show that finding a fair, transparent, and straightforward pricing strategy remains an ongoing challenge. Businesses strive to maintain profitability while customers seek to maximize value. Balancing these interests requires a careful blend of innovation, psychological insights, and a deep understanding of market dynamics.

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