The Pricing Strategy — an extract from my Product Monetization Guide

11 Product Pricing Strategies to build your Pricing on the right foundations. Stop guessing and start using a structured approach to capture more value from your product.

Pricing Strategy — An extract from the full pricing monetization guide

This is an extract of the FULL PRICING GUIDE, available for FREE on my website: https://salvabocchetti.com/pricing-and-monetization-guide/

When it comes to pricing, many companies, regardless of their size, tend to treat it as an afterthought or make pricing decisions based on guesswork. However, pricing is much more than just the money you receive from selling a product or service. It is a crucial marketing element, a tool for product growth, and the most important feature of your offering. So why is pricing often neglected and left to gut feelings and last-minute decisions?

The truth is that pricing is a challenging topic. Many companies struggle to determine where to start and get caught up in irrelevant tactics and details. Discussing money can also be intimidating, depending on the company culture. Regardless of the price you set, it will attract some customers while discouraging others. However, there is a significant opportunity to leverage pricing to benefit your business. By actively addressing pricing with confidence and knowledge, on a regular basis rather than during crises, you can make pricing a valuable asset for your product.

In the following paragraphs, we will explore practical tools that can help you approach pricing discussions confidently and determine the right pricing strategy for your product in your specific market and at a given time.

The biggest misconception:

We are all familiar with the concept of the demand curve, which represents the relationship between the demand for a product and its price. As the price increases, the number of potential buyers decreases. This seems logical, but the reality is more complex.

The price itself influences the product’s positioning and perceived value, which in turn modifies the shape of the demand curve. Setting a price too high can further reduce demand, and setting it too low may also have negative consequences. In other words, the price itself can shift customers from one demand curve to another, creating “discontinuities” on the theoretical demand curve.

Prices affect the demand curve itself by communicating the value of your product and influencing its positioning and the perspective of your future customers. Viewing pricing as a communication tool and a product feature reveals that it can be used to differentiate and communicate the value of your products to customers. Consider your website: where do users go to understand what they are buying, what they will gain from it, and how do you compare to the competition? It’s often the pricing page.

Setting the Foundation

Before diving into pricing specifics, it’s essential to establish the basics. Before jumping into pricing discussions, consider the following factors:

1. Value Proposition & Drivers: Clearly articulate why customers buy your product and how it helps them achieve their objectives.

2. Positioning & Alternatives: Identify competitors and understand how you want your product to be positioned relative to them. Determine the market segment you aim to target, whether it’s a premium, good value for money, or budget-friendly.

3. Differentiators: Assess your ability to differentiate your product from competitors based on features or value. Consider whether your pricing strategy can serve as a differentiator, such as offering flexible pricing models.

4. Value Unit: Decide on the basis for charging customers. For example, if you offer a SaaS service, will pricing be based on the number of users, monthly usage, or another metric?

5. Objectives: Define the goals you aim to achieve by adjusting pricing. Are you trying to increase margins, penetrate a new market, or accomplish something else? Remember that there is no single best pricing strategy; it must align with your product and objectives.

Pricing requires a rational and methodical approach. Without the right tools and mindset, you risk making reactive decisions, leaving money on the table, or entering a negative pricing cycle. Before entering the pricing drawing board, ensure you have a solid understanding of your product’s fundamentals.

Developing Your Pricing Strategy

A pricing strategy determines how you will set prices within an acceptable range — between your variable unit costs and the value perceived by customers.

While variable costs remain relatively constant, the perceived value varies among customers. Therefore, the upper limit of acceptable pricing is not fixed. The key is to define an approach for setting prices, rather than obsessing over specific pricing points.

It’s worth noting that SaaS products offer more flexibility in pricing since their marginal costs are typically low or even zero. However, this does not mean that the variable costs are nonexistent, as customer acquisition costs must be considered.

Pricing Strategy options:

• 1) Cost Plus or Cost-based Pricing: This straightforward strategy involves determining a markup or margin based on your variable costs and adding it to the selling price. While easy to implement and guaranteeing a profit on each sale, this approach lacks a connection to your product’s value and market context.
• 2) Penetration Pricing: If entering a new market, pricing can differentiate you by offering lower prices than competitors initially. This strategy aims to attract customers and establish loyalty before eventually raising prices. For example, EasyJet started with lower prices, building a reputation as a low-cost airline. They have since aligned prices with competitors, implemented add-on options, and adopted dynamic pricing.
• 3) Price Skimming: This strategy is the opposite of penetration pricing and is useful in new markets with minimal competition. By setting high prices initially, you focus on capturing maximum profit from customers with the highest willingness to pay. Over time, you can adjust prices and target other market segments. However, be cautious as high prices can impact your brand perception.

• 4) Competition/Market Pricing: In a competitive market, you cannot ignore competitors’ pricing. Competition pricing involves setting prices based on reference prices and making minor adjustments depending on your positioning. It is crucial to differentiate your value proposition beyond features alone, possibly through a unique business or revenue model.
• 5) Value-based Pricing: Considered the “holy grail” of pricing, this approach focuses on the value you deliver to customers rather than unit costs or competition. It requires understanding customers, their motivations, and why they choose your product. However, value-based pricing only works if you can differentiate your product from competitors effectively.
• 6) Performance-based or Outcome-based Pricing: This strategy links pricing directly to the benefits or results you provide to customers. It can involve revenue sharing or commissions. Customers are willing to pay more if they perceive a direct correlation between your product’s performance and its success. This model requires confidence in your product and a clear understanding of your customers’ needs.
• 7) Differential Pricing: By adjusting prices based on individual customers’ willingness to pay, you can capture maximum value. However, be cautious of cannibalization, where customers willing to pay more opt for a cheaper option. Discrimination becomes crucial to ensure tailored offers that align with customers’ willingness to pay. Auctions represent the ultimate form of price discrimination.

• 8) Dynamic Pricing: The same individual may have a varying willingness to pay depending on context. Dynamic pricing adjusts prices based on customer-specific factors like time, weather, distance, and location. It complements differential pricing. For example, ride-hailing companies adjust fares based on demand and supply.
• 9) Bundle Pricing: Bundling multiple products together allows you to address customers with different willingness to pay without compromising individual product pricing. Bundles are common in SaaS products, enabling you to serve diverse market segments.

Variants of Penetration Pricing

Two specific variants of penetration pricing are worth mentioning:

• Crowdfunding Pricing: In crowdfunding, offering lower-than-expected prices can help generate demand and create a market. The initial lower pricing is often followed by an increase once the market matures and the brand establishes itself.
• Predatory Pricing: This variant aggressively lowers prices to the extent that it becomes unsustainable for competitors, aiming to eliminate them from the market. Predatory pricing is illegal in some jurisdictions and may be considered an unfair competitive practice.

Remember, tactics like presenting a loss leader or the number of pricing plans in your offer come after establishing a pricing strategy.

In the previous sections, you’ve seen 11 different pricing strategies. Focus on developing a robust strategy first, and then address tactics and details.

The Right Time to think your Pricing Strategy

Many companies start considering pricing when faced with sudden changes or urgent adaptation needs. This reactive approach is valid, but there are other crucial times to proactively address pricing:

• Product Launch: Strategic pricing should be considered from the beginning. Missing an opportunity at launch can be challenging to recover from, as positioning becomes ingrained in customers’ minds. If you’re creating a new category, price skimming may help capture early value. If you can quantify the benefits your product provides, performance-based pricing maximizes profits while reducing risk for potential customers.
• New Products in Your Portfolio: This is an excellent opportunity to reassess the bigger picture. How do new products fit together? Are they positioned to differentiate customers based on their willingness to pay? Can bundling be used to capture value more effectively?
• Market Changes: If a new competitor enters the market with lower prices, it may be time to review your positioning and explore options for premium pricing or dynamic pricing to maintain profitability.
• Regular Reviews: Don’t wait for specific events to reconsider pricing. Regularly reviewing your pricing strategy allows you to adapt to market dynamics and refine your approach. Some businesses continuously experiment with pricing tactics while conducting strategy reviews on a yearly basis.

Avoiding Pitfalls and Focusing on Strategy

To wrap up, here are a few common pitfalls to avoid:

• Falling into the “good-better-best” trap: While pricing plans can be useful for structuring offerings, don’t start with them. Begin by defining your value metric and pricing strategy before working on specific pricing plans.
• Getting caught in the “price hook” trap: Avoid building your positioning around a predetermined price. Start fresh and approach the problem from a new perspective, rather than reverse-engineering your strategy based on desired pricing.
• Getting stuck in details: Don’t waste time debating minor price differences or whether to end prices in .0 or .99. The fundamentals of pricing, such as positioning, value metrics, and strategy, have a more significant impact.

Remember that pricing strategy should be tackled with a clear mind and a strategic approach. By understanding the fundamentals, adopting the right tools, and avoiding common pitfalls, you can unlock the full potential of pricing and drive the success of your business.

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This is an extract of the FULL PRICING GUIDE, available for FREE on my website: https://salvabocchetti.com/pricing-and-monetization-guide/

My name is Salva, I am a Product executive, helping tech companies discover, shape, and sell better Products. My work and writing are about subscription models, product pricing, monetizsation, e-commerce/marketplaces, and creating top product organizations.

My superpower is to move between ambiguity (as in creativity, innovation, opportunity, and ‘thinking out of the box’) and structure (as in ‘getting things done’ and getting real impact).

I am firmly convinced that you can help others only if you have lived the same challenges: I have been lucky enough to practice product leadership in companies of different sizes and with different product maturity. Doing product right is hard: I felt the pain myself and developed my own methods to get to efficient product teams that produce meaningful work.

Originally published at https://salvabocchetti.com on July 12, 2023.