Pricing your product or service is one of the hardest things to do. There are so many dimensions to it that it is easy to get lost. Here, I am going to share what I learnt.
Disclaimer: I don’t run a fortune 500 company but I’ll be honest and bare my soul (dramatic, sorry). I encourage reading it with healthy skepticism.
4 Strategies for Pricing Your Product:
1. Look at the competition
This is the easiest path to tread if your competition has prices disclosed on their website. Hopefully, you already understand what they do and how you are different. Now it’s about looking at the prices for their offering. As a new entrant with no reputation in the market, you will try and go below their price point. A counterintuitive but powerful approach is to go higher as people tend to perceive value differently.
It is a good starting point to get you started without too much research or market discovery.
You won’t be caught off guard when a customer asks you for a price in your very first pitch because you have a fallback.
Going below your competitor’s price point only gives you an advantage if your competition is known to the customer. For a greenfield customer — you may end up underquoting.
Using this approach without understanding the competitor’s discount strategy may mean you over-quote or become susceptible to heavy bargaining.To use this approach you need a very good grip on both your costs as well as the competitor’s costs. The competition’s cost structure may be the reason that they offer a price. You may never be able to break even at that cost.
2. Look at the user buying patterns, price anchors & budgets
This requires some amount of research and on-the-ground work to uncover. Understanding how your buyer persona spends will help you discover a pricing model for your product. For example, let’s say you are selling an HR technology solution, it would help to understand what other HR technology solutions the company uses. Even if it is not a competing product. You then arrive at some sort of rough spending in an area and try to extrapolate your pricing. So, if you see that every other SaaS product the HR in company X uses is between $20-$30 per month per user, you take advantage of that. Price your product in the same range. Since the user already spends in that range, your product pricing won’t ring any warning bells.
Some vendors can sell you specific information about companies like how much of the annual budget is unspent for the financial year. It lies in a legal grey area so I never explored it but that is an extremely powerful tool. Departments don’t like to leave unspent amounts in their allocated budget as it reflects poor forecasting. They are likely to get shortchanged the next time around. Sounds stupid but I have heard this from so many different legitimate sources that I now believe it. FACEPALM.
It’s Storytime. I met someone who was telling me their sales process to colleges. Their sales team would walk in unannounced and just sit around in the administrative block as if they are waiting on someone. If you know Indian colleges, there are always people waiting in the lobby and everywhere. They observe the clerks and identify the guy who is the right hand to the decision-maker. On the second or third day they approach him, take him for a drink/lunch and build rapport. On the third day, they fix up an appointment with the decision-maker to make the pitch. Finally, they grease the clerk’s palms and then get all the information about other vendors and whom to influence. The clerk sometimes even sabotages products to get the vendor in. It’s crazy. I couldn’t believe it but the customer discovery some times works in shady ways. Did I mention that this charade ended with a death threat?
Don’t try this. I only referred to this to explain how understanding the decision-makers and their spends is important.
It’s a very scientific approach to pricing so the process ensures that you gather a lot of insights about your customer which can be invaluable in your sales.
It takes time and a lot of energy.The path to getting this information is not straightforward so get ready to spend a lot of time and doing a lot of dirty stuff.
3. The ROI path
Ideally, your product brings about an improvement or eliminates the need for some cost. Price your product such that it reduces that cost. For example, putting in software X eliminates the need for papers & 2 staff members.
Monthly Stationery plus Salaries = $10000
Product X needs to be priced such that there is a benefit to putting it in place.
Say, Monthly Subscription for 10 Users = $4000
The ROI or Return on Investment = $6000
The closer the price of X gets to the cost, the lesser viable it will become for some to buy it. The other reason for putting in X could be that data that was on paper can now be reported and analysed. Whatever the story, you will need to measure the cost accurately so that your replacement reduces it significantly.
It is a very direct approach, easy to sell & explain
Costs that you are replacing may be very tricky to get access to.
Costs may vary from organisation to organisation.
Sometimes your product may replace only a part of the costs so it will become hard to sell.
4. The cost + margin approach
This one is probably the easiest. It works well for completely new products that have no relatable competitor. It is simple, figure out your costs & then add a margin on top. Ideally, your margin should cover all fixed and variable costs in delivering the service.
If you have taken 1 year to build a product with a team of 10, you obviously can’t bake in all the costs into your first subscription. You will need to plan for a recovery based on the market size over a period.
Straightforward and easy
Costs change with scale & estimating for scale to bake it into your pricing is very tricky especially if your costs increase with usage.It may run contrary to willingness to pay so you need to be careful.
Whichever one you choose, you need to be smart and keep iterating on it.
You can shoot yourself in the foot with a price point that isn’t well thought out. You will then be scrambling trying to focus operations on keeping the cost down instead of adding value. This prevents you from ever being able to raise that price.
In the next section, I am going to focus on what other things you should avoid/stick to in a FAQ format.
Should I expose my pricing on the website?
It depends on which stage of your business you are in. In the early days, there is no need to do it unless you are trying to outdo your competitors solely on price.
As you progress and acquire more customers, please do. Pricing on the website is a must when you expect self-onboarding and purchasing. If the product is completely self-serve, go for it.
Remember, you will need to”grandfather” your customers who have already signed up whenever the prices go up or down. This can be tricky especially if you drop prices.
How do I handle bespoke pricing?
Bespoke pricing is usually done for enterprises. It can be tricky because you‘ll never know their appetite for spending. The first thing you need is an excel sheet with which you can determine the basic factors like Transaction volumes, no. of users, etc. Whatever helps you narrow down the factors that go into your pricing plan. Once you have the data, you can work out everything you need and make assumptions.
Is there a preferred way of pricing — Volume vs. User-based?
This depends on what drives your cost & what users are doing on the platform. For something like office365 or Gsuite, everything is user-centric, the choice is clear. For a platform like ours which is in the hiring space, some users are transient like hiring managers. Once the job opening closes, they no longer are active so here the transaction matters not the user. You should pick the plan that is convenient for your user, which will help them gravitate towards you. Also, keep in mind there should be a way to map that price back to your unit costs.
If your unit cost happens to be per transaction and your pricing plan is per user, calculating your margins will become a huge challenge. Also, how do you know how to optimize? You’ll do this a lot and have elaborate assumptions which are a recipe for disaster.
Should I sell pay-as-you-go plans?
Yes & no. If your business model is changing every day and you are exploring product offerings, offer pay-as-you-go plans. They allow you to experiment freely. It also allows your customers to choose if they want to stay committed to you for longer periods. Pay-as-you-go plans allow you to get your foot in the door with very little commitment, hook the customer with your product and then make a larger sale.
Subscriptions with upfront payments have obvious advantages. They bring in predictability to your cash flows. They allow you to optimize costs (like cloud infrastructure) because of the ability to reserve machines. They also ensure that you are getting revenues consistently, not to mention shied you from the risk of payment delays and defaults.
Choose your poison wisely.
Think through international markets when you create a publicly visible pricing plan.What may be priced high for one market may be very low for another. So don’t short-sell your product, do the appropriate research & iterate in every new market.Irrespective of how you choose to price the product, Iterate till you get rich or die trying.Some times, some indirect competitors will disrupt the market with very low pricing. You can’t beat them on price, beat them on value.
If your market is unable to perceive the value, educate the market( read as marketing costs) and then sell. If this doesn’t work, you have the wrong product or are in the wrong market. You may be too early in an immature market.
Pricing is not something you do once. Just like the rest of your product, it is something you should constantly review.
I hope you enjoyed reading this.