The Art of Product Pricing: A Guide for Product Managers.
One of the primary objectives of a Product Manager is to maximise the value of the Product. This encompasses various strategies, including the continuous decision-making process regarding what features to include or exclude in the product development journey.
However, an often overlooked avenue for maximising the product’s value lies in the product’s pricing strategy. Effectively navigating and leveraging pricing decisions can prove instrumental in enhancing the overall value proposition of the product, aligning it more closely with market.
Navigating the intricacies of product pricing, especially for software and services, can be a challenging feat. Unlike traditional products with a tangible cost of goods sold (COGS), determining the right pricing strategy for a Software as a Service (SaaS) product involves a myriad of considerations. Even after selecting a pricing strategy, the devil lies in the details. Each decision made in the pricing journey significantly impacts the product’s market positioning and overall success.
This article serves as a comprehensive guide for product managers, shedding light on the intricacies of product pricing. Exploring fundamental pricing concepts and strategies, as well as highlighting best practices to empower product managers with the insights and knowledge needed to navigate the complexities of pricing
Before we go on, it is important to note two (2) things;
1. Product Managers do not always own the Pricing Strategy:
Depending on the product and organizations, product managers may not always have direct ownership of pricing decisions for their products, sometimes, it delegated to higher levels of management as they play a crucial role in determining the appropriate pricing strategy. Seeking clarity on their authority in setting and adjusting prices is imperative. Pricing decisions in product management are inherently collaborative, involving input from various stakeholders. Product managers work closely with cross-functional teams, including marketing, sales, and finance, to collectively determine the most effective pricing strategy.
2. Pricing is part of Product Strategy
Pricing is an integral component of a comprehensive product strategy, playing a pivotal role in shaping the overall success and market positioning of a product. While some may mistakenly view pricing as a detached aspect from the broader product strategy, the reality is quite the opposite. The two are intricately linked, with pricing serving as a strategic tool to communicate the product’s value, differentiate it within the market, and ultimately contribute to achieving the product’s broader business goals.
Now that we’ve gotten that covered
let’s get into it
What is Pricing?
Pricing refers to the process of determining the monetary value or cost assigned to a product or service. It involves setting a specific amount that customers are expected to pay in exchange for the perceived value of the offering.
Pricing communicates to the market exactly what you think your value is. And it directly impacts how much revenue you are able to generate for the organisation. If you set the price too high or too low — or choose the wrong pricing strategy altogether — you may not find enough customers who will buy the product. Your product can fail to take off simply because it is priced incorrectly.
What are Pricing strategies?
Pricing strategies are intricate methods employed by businesses to effectively determine the prices of their products or services. These strategic approaches are essential for optimizing profits and enhancing shareholder value, all while taking into account consumer preferences and market demand.
Picture pricing strategies as the navigational tools steering a ship through uncharted waters. Each strategy acts as a compass directing the course of the ship (product) along diverse routes, all with the ultimate goal of reaching the island of profitability. Now, let’s delve into 7 of the popular strategies.
1. Cost Based Pricing
Cost-based pricing is a pricing strategy where the price of a product or service is determined by calculating the total cost of production and then adding a markup to cover desired profit margins. This approach focuses on the expenses incurred in manufacturing, distributing, and selling a product, such as raw materials, labor, and overhead costs. The markup is a percentage added to the total cost to ensure profitability. Cost-based pricing does not directly consider factors like market demand or customer perception but centers on covering costs and generating profits based on the production expenses.
Example: Oracle
ERP software solutions, such as Oracle Corporation, utilizes a cost-based pricing strategy for its extensive range of enterprise software products and services. As a provider of database management systems, cloud solutions, and various business applications, Oracle’s pricing model is influenced by the costs incurred in developing, maintaining, and enhancing its sophisticated software offerings.
2. Value-based pricing
This is a strategic approach that determines the price of a product or service based on the perceived value it delivers to the customer. This strategy focuses on understanding the customer’s willingness to pay for the benefits and unique features offered, rather than solely considering production costs or competitor pricing. Implementing a value-based pricing strategy involves a deep understanding of customer needs, effective communication of the product’s value proposition, and the ability to capture the value created for customers.
Example: Tesla
Tesla follows a value-based pricing model for its electric vehicles. The prices are higher than many traditional vehicles, but customers are willing to pay the premium for the innovative electric technology, superior performance, and the brand’s commitment to sustainability.
3. Penetration Pricing:
Penetration pricing is a market strategy designed to quickly capture a significant market share by offering a product at an initially lower price than its perceived market value. The primary objective is to attract a large number of customers rapidly and establish the product in the market. This approach is particularly effective in industries where competition is intense, and a quick market entry is crucial. The lower initial price encourages widespread adoption, creating brand awareness and customer loyalty. However, it may lead to challenges in maintaining profitability in the long term, and careful consideration of the eventual price increase is necessary.
Example: Adobe Creative Cloud
Adobe initially introduced Creative Cloud with a subscription-based model at a relatively lower price point compared to their traditional software licenses. This strategy allowed Adobe to quickly attract a broad user base seeking access to their suite of creative tools. As the user base expanded, Adobe could then adjust subscription prices or introduce premium features, effectively leveraging the initial penetration pricing to establish itself as a dominant player in the creative software market.
4. Skimming Pricing
Skimming pricing involves setting a high initial price for a product, targeting early adopters and customers willing to pay a premium for innovation or exclusivity. This strategy is particularly effective for products with unique features or advanced technology. Over time, as the market demand among early adopters is satisfied, the price is gradually lowered to attract a broader audience. Skimming pricing allows companies to capitalize on the willingness of certain customers to pay a premium for the latest and most innovative products.
Example: Apple
Apple’s strategy for launching new iPhone models often involves skimming pricing. The latest iPhone is introduced at a high price point, catering to early adopters, and the price decreases over time as new models are released.
5. Freemium Models:
The freemium model is a pricing strategy that offers a basic version of the product for free, aiming to attract a large user base. Users are then enticed to upgrade to a premium (paid) version, which includes additional features or advanced functionality. This approach is commonly used in software and digital services, allowing users to experience the product’s core functionalities before committing to a paid subscription.
Example: Spotify
Spotify, a music streaming service, employs a freemium model. Users can access a free version with ads and limited features, while the premium version offers an ad-free experience, offline listening, and enhanced audio quality for a subscription fee.
6. Dynamic Pricing:
Dynamic pricing is a flexible strategy where the price of a product is continuously adjusted based on various factors such as demand, supply, competitor pricing, and customer behavior. This approach allows companies to adapt to changing market conditions in real-time, optimizing pricing for maximum revenue or market share.
Example :Uber
Uber utilizes dynamic pricing, often known as surge pricing. During periods of high demand, such as rush hours or special events, Uber adjusts its pricing to encourage more drivers to be available, balancing supply and demand. This dynamic pricing model benefits both drivers, who earn more during peak times, and riders, who can still access transportation services despite increased demand.
7. Geographic pricing strategy
Geographic pricing strategy involves adjusting the price of a product based on the geographic location of the customer. This approach recognizes that different regions may have distinct market conditions, consumer behaviors, and economic factors that warrant customized pricing. Implementing a geographic pricing strategy allows businesses to be more responsive to local market dynamics and enhance competitiveness in diverse regions.
Example — Microsoft Office 365:
Microsoft often adjusts the pricing of its Office 365 subscription plans based on geographic locations. Prices for the same plan may differ between countries or regions, reflecting variations in market conditions.
Considerations before picking a pricing strategy.
(a) Evaluate Pricing Potential:
Setting the right price for a product begins with a meticulous evaluation of its pricing potential. This involves a comprehensive analysis that considers various crucial factors. Firstly, production costs must be thoroughly understood, covering expenses from product discovery to delivery. Simultaneously, market demand plays a pivotal role; a high demand may support a higher price point. Equally important is the perceived value of the product — what unique features or benefits does it offer that customers find valuable? By carefully assessing all these elements, you can determine a viable pricing potential that strikes a balance between cost, demand, and the perceived value that customers associate with the product.
(b) Know the Target Market:
Understanding the target market is paramount in crafting a successful pricing strategy. A profound analysis of customer behavior, needs, and preferences is crucial. By comprehending how customers intend to use the product and what specific features or benefits they value most, businesses can tailor their pricing strategy to align with customer expectations. Recognizing the perceived value that customers associate with the product becomes key; this influences their willingness to pay. By aligning pricing with the unique value proposition that resonates with the target audience, businesses can enhance customer satisfaction and establish a pricing strategy that reflects a deep understanding of their customers.
(c) Analyse Past Data:
Drawing from past experiences is an invaluable aspect of refining and optimizing a pricing strategy. Analyzing past data provides a wealth of insights into customer behavior, market dynamics, and the efficacy of different pricing models. By identifying patterns in past successes and failures, businesses can refine their current approach. Understanding customer responses to various pricing points and models helps in avoiding pitfalls and replicating successful strategies. This data-driven approach ensures that the current pricing strategy is informed by real-world outcomes, allowing for more informed and strategic decision-making.
(d) Look at the Competition:
A vigilant examination of competitors’ pricing is indispensable for positioning a product effectively in the market. By comparing competitor prices for similar products, businesses can gain insights into the market landscape and identify competitive pricing ranges. This analysis sets the stage for strategic decisions. If competitors charge more for a comparable product without offering significantly more value, setting a lower price can attract cost-conscious customers and secure a competitive edge. Conversely, if a product offers superior features, quality, or benefits, pricing it higher is a strategic move, underlining confidence that customers will recognize and willingly pay for the added value. This competitive pricing analysis ensures that businesses remain agile in response to market dynamics and maintain a competitive stance.
After picking a pricing strategy…
The recognition that pricing is not static, but rather a continually evolving element, is crucial for product managers. Staying iterative is the mantra, acknowledging that what works in one market condition might require adjustments in response to changing dynamics. This iterative approach entails a willingness to analyze market feedback, assess the competitive landscape, and recalibrate pricing strategies accordingly.
Best Practices for Product Pricing:
- Stay Informed: The pricing landscape evolves with market trends, technological advancements, and changing consumer behaviors. Stay informed through industry publications, webinars, and networking to keep your pricing strategies aligned with the latest developments.
- Experiment and Learn: Don’t shy away from experimenting with new pricing models or strategies. Treat each attempt as a learning opportunity. Analyze the outcomes, gather feedback, and iterate. This iterative process fosters a culture of continuous improvement.
- Customer-Centric Approach: Always keep the customer at the forefront. Understand their evolving needs and preferences. A pricing strategy that resonates with your target audience contributes to customer satisfaction and loyalty.
- Adapt to Feedback: Feedback, whether from customers, sales teams, or market trends, is invaluable. Be open to adapting your pricing strategies based on feedback. Flexibility and responsiveness are key attributes in refining and optimizing your approach over time.
In essence, mastering the art of product pricing is a continous journey that requires adaptability and strategic thinking from product managers. While they may or may not have ownership of the whole process, it is essential that they are key players in the process. It is important to align pricing decisions with overarching product strategies as it directly impacts the value proposition and success of a product in the market. By understanding the diverse pricing strategies, considering market dynamics, and fostering collaboration across teams, product managers can navigate the complex terrain of pricing with confidence.
