VI

There have been a few questions floating around recently regarding pricing, and much of the information available on the web is either way too academic or downright stupid, so I thought it was time to answer them all at once.  I’ve never come across a methodology for pricing, rigorous or otherwise, so this is a collection of ideas that have just been picked up along the years.  As usual, big caveats for what may be generalizations.

The first / only rule of pricing?  Your business should make money!

Now at this point, most of the web material you’ll come across will dive head first in price elasticity and economics’ supply and demand curves.  All good stuff, but as much use as a chocolate teapot if you’re launching a new business or product.  The only take away from it is ‘you’ll probably sell more if the price is cheaper”.  But that, by itself, doesn’t indicate whether you’ll make more or less profit at the end of the day.  The only way you can tell is to plug in different pricing scenarios and corresponding unit sales / subscriptions and see what flows to the bottom line.  (Using Excel “What-If Analysis” really helps here.)

In general – in software and web services – reducing price and increasing volumes is emphasizing revenue and market share, and increasing price and reducing volumes is emphasizing profit – but it really depends on your underlying cost structure – all those operational costs.

Next.  Match the price to buyer price sensitivity.  We all come to our own personal threshold of price sensitivity – individually as consumers, or as buyers for businesses.  I really don’t think about buying an iPhone app at $2.99, but I do at $9.99.  Neither does $50 a bottle for a good wine cause me to think twice, but $200 would.  We all have our own concept of value, some is very subjective, and much is quantifiable.  As some stage the value proposition of your product or service can be reduce to a financial equation, e.g. how many months value from your product or service will it take to recover the cost?  The longer it take to get that ROI, the more likely your product is overpriced, or lacking function / value – you can fix either, but reducing the price can be lot easier and quicker that adding more functionality to the product.

Then there’s competition (and there’s always competition).  As with ROI, if you are pricing at the maximum of all those competitors, then there had better be hard value that can be easily demonstrated.

So, in simple terms, you need a price that makes a profit at the volumes you’ll be selling, and that clearly demonstrates adequate value over the cost to a buyer, and the competition.

The next step sometimes leave product managers frozen in the head lights … “what if I get it wrong?”  Well, you will get it wrong, everyone does.  More precisely, rather than being wrong, you’ll probably want to adjust pricing – both up and down – to test different markets, campaigns, value propositions, etc.  But it isn’t earth shattering to either get it wrong, or to recover from it.

It’s also worth a quick side trip into sales at this point.  If a product isn’t selling, the first and by far the most common reason given by sales people is “It’s too expensive.”  If you’ve never managed sales before this can be quite disconcerting, and you may be tempted to create knee-jerk price reductions.  Ask the question “Which element of the product’s value proposition did you not manage to sell?”  That’ll teach you volumes about the sales cycle, process and individual sales folks.  More on that in a bootcamp session of survival skills for sales and sales management.

But, back to the plot.  Let’s say you’ve done all of the above analysis and come to the conclusion that your product should be $599 or $10 / month subscription.  But your really don’t know.

Here are some options:

1. Launch with full price or a “launch promotion discount” that expires after 30 / 45 / 60 days.
    
2. Evaluate your pipeline and bookings against planned volumes – remember you’ll also be testing a new sales process and possible sales team / strategy.  Drill into the reasons for low sales.
   1. If you decide your price is too low. 
      Grandfather your existing customers on their price / subscription and then either step them through a price increase at the moment schedule, or leave them on that price indefinitely.
   2. If you decide your price is too high.
      Immediately reduce price for all future sales, and find some way to compensate your initial customers for being over charged.

      In either of these cases you can create a winning experience for your customers.

Finally, a couple of other points.

1. Don’t overuse discounts.  It’ll become an entitlement.

     2.    Expect to be field testing multiple price plans as any one time, so get used to price plan conversions.