Setting the price can be one of the most challenging parts of taking your product to market. If you go too low you risk undervaluing your product. But if you go too high will you be seen as not worth it or too high-end?
Not only does cost signify your value and positioning to your buyers and competitors, but it’s also not something that can easily be changed once you make a decision. It can be tempting to just make a gut decision and then alter that pricing later down the road once you bring in customers, but changing your price at any point is no small task.
A price change will impact the customers you’ve already brought in, as well as your reps and marketers who communicate about your product to customers. Because of that, it’s critical to not only price your product correctly in the long-run, but get it right the first time around.
To achieve your perfect product pricing utilizing these four key elements during your decision-making process:
Strategic and Business Goals
One of the most important considerations when thinking about the price of your product is to make sure that the price point aligns with your company goals. Everything you do should align with who you want to be as a company as well as how you want to get there.
If you are trying to enter a new market, you may be tempted to use a lower price point to get a large number of customers quickly. However, if your offering is not a mass-market product or you are hoping to eventually position it as a luxury-style product, that’s probably is not the right pricing strategy for you.
Setting the right expectations around your product’s price from the start will ensure that you bring in the right type of customers from day one rather than acquiring a large number of poor-fits.
Thinking for the long term will help ensure higher customer retention and company growth. It will also help you avoid many issues down the road that require pricing and product adjustments like high churn rates.
An important thing to consider while deciding on your product or positioning is the people you are selling.
You need to have your ideal customer profiles and buyer personas mapped out so that you can make sure the price point you are considering is right for the individuals who will see the most value from your product.
Consider who has the most willingness to pay and the most willingness to buy.
Oftentimes companies with larger budgets will have a higher willingness to pay for something in comparison to small- to medium-sized businesses. On the other side, some types of companies will have a higher willingness to purchase because they will need your product more than others, but they may not have the budget to do so as freely as larger companies.
In either case, understanding the people you are trying to convert into long-term customers will allow you to choose a price point that fits their needs and budget capabilities while still generating a profit.
Your pricing isn’t just one flat number across the board. There are many different layers and options to any pricing model. You need to consider whether or not you will offer discounts, have different levels or tiers, and what terms you will offer to your customers.
At many companies, pricing structure involves different tiers or models that customers can choose between.
Will your pricing be tiered, a-la-cart, or freemium? The answer to that question often differs based on industry as well as the specifics of how your product works and operates. Regardless of the decision, you want to be sure your pricing model is set up to fit not only customers who initially buy, but who will grow with your product as well. Understanding your value metric can help you determine the most appropriate pricing model.
Your value metric is the metric that best correlates with where your buyers see value in your product.
In other words, it’s the thing about your product that makes customers keep coming back. An easy example of this is an email automation software company. This company is most often going to have users paying based on the number of contacts they store, thus making their value metric contact storage. They can then build their pricing strategy around that value metric. For instance, maybe tier 1 is $100 a month for 1,000 contacts, tier 2 is $150 a month for 2,000 contacts, and so on.
Understanding your value metric is an important piece of your pricing, especially if you are going to use a tiered system as your price tiers will be based around that value metric.
Your net terms are how long you will offer contracts to customers when they purchase your product.
If you can get someone to commit to a five-year contract that’s great, but that probably is not going to be the case for most companies.
Your pricing contract or net terms have to align with the value of the product they are purchasing. Your customers need to be able to realize value well beyond the price of your product within that initial contract.
For a lot of companies who offer month-to-month pricing, they can do this because their solution has a short time to value, and they can count on buyers being able to make a real decision to renew or not renew in that amount of time.
If you were to put one month on a product that takes six months to a year to see real value from, then you may see customers churn because they are reviewing the cost of your product before they can validate spending it again.
You should also think in advance about if you’ll offer discounts. If so, how much will you discount? What is your policy around offering discounts?
Discounts for customers who are purchasing multiple products from you are also an option. This can be a great way to get customers to purchase more from your company as well as allow them to try out multiple products or services at a discounted rate.
Regardless of what decision you make on discounting, determining these elements before launch will make sure your pricing is fair across the board. It will also help your sales team do their job as transparently as possible when questions arise in the sales process.
You cannot neglect competitors when it comes to your pricing strategy. First and foremost you have to understand what your competitors are charging for a product that is similar to yours.
If you are charging way more than your competitors then you will be seen as a luxury product or a high-value brand.
This isn’t necessarily a bad thing, but it should be a major factor in how you bring your product to market and how you want to be perceived.
Your competitors will also tell you a lot about what is accepted in your industry in terms of pricing. While you don’t have to stick to the status quo, you should be mindful of how you are positioning your product by pricing your product differently and at the very least you need to be prepared to back that price up with your value prop.
Pay attention to the way your competitors are pricing their product in terms of how visible they make pricing and the way that they bucket or tier their pricing too.
Being aware of these things will help you position yourselves against your competitors better even if you go with a different pricing model. This will also help you to better predict conversations that may occur with potential customers who are looking at or vetting some of your competitors.
Pricing your product isn’t easy and although you shouldn’t constantly be making adjustments to your pricing, it doesn’t mean you can never change it in the future. But, a huge part of launching your product successfully is the way you price it.