When we first moved to Australia in the 1970s, we kept in touch with relatives in Sri Lanka with the occasional long-distance phone call. They were expensive, so we four kids all lined up by the phone, spoke very fast for our allotted couple of minutes, and quickly passed over the phone to the next in line.
Contrast that with forty years later, when my partner Nikki and I took a cruise to the South Pacific. Nikki called her teenage son Josh, who was staying with his grandparents on their farm in Western Australia, on Facebook Messenger and enjoyed a crystal-clear video call – for the relatively low cost of Wi-Fi access.
I was struck by the contrast between this and my own experience as a child. But even more striking was that, for Josh as a digital native, he had never known any different. This was just something he took for granted.
That’s the power of digital technology: Digital is so much cheaper, and sometimes it’s free (or with such a small marginal cost it might as well be free). And that changes customers’ expectations.
Here are four ways digital technology has changed the way people expect to pay for products and services.
1. Lower Prices
Because digital products cost much less to produce – by orders of magnitude, not just a few percentage points – they can be priced much lower than physical products, and still have generous margins. Email marketing reaches thousands for a fraction of the cost of printed mail, Zoom brings people together from anywhere with no travel costs, and the original iTunes let users download songs for about a dollar each.
Digital technology also enables low-priced subscription business models, where customers prefer to pay a low monthly rental fee than an up-front price for ownership. Apple killed CD sales by making music cheaper, but Spotify transformed that business model with a monthly subscription to all the music in the world.
Some digital products remain free to most users, except for a few who pay for a premium upgrade. This is the “freemium” model, where even as few as 10% of fee-paying customers makes the service profitable and sustainable. Many digital subscriptions – such as Dropbox (file storage), FreshBooks (small business accounting), and HootSuite (social media management) – use this model.
Some companies like Facebook and Google take this even further, making their core products entirely free to everybody, in exchange for their attention and data, which they then sell to advertisers. Others, like Spotify, offer an ad-supported version free and remove the ads if you upgrade (This combines all three of the subscription, freemium, and ad-supported models!).
How do YOU leverage digital pricing models?
Many established businesses want to do “digital transformation”, but don’t really know what that means. If you want to cut to the chase, this is the thing that really matters: Your customers and clients want more for less, and digital enables you to deliver meet that expectation. Many businesses struggle to compete with smart, savvy digital-first competitors who leverage the low cost of digital technology.