When you’re setting pricing for your product, conversations can be more confrontational than you’d think.
Everybody has a reasoned and valid opinion on how pricing should be set, from experience with past companies, watching competitors, ‘best practices’ articles, or even individuals influenced by the ‘IKEA effect’ bias. Here are some fictional examples that you might recognize from real life:
- The CEO, who wants low prices to win more customers
- Your head of product, who wants to charge more to reflect the product quality
- A CMO who wants to use pricing to position for the mid-market
- The CFO whose team put much effort into calculating COGs and wants to ensure a healthy profit margin
As a product marketer or person in charge of coordinating pricing, you might be tempted to lock stakeholders in a room and wait with baited breath for them to walk out, smiles and handshakes all around as they celebrate their new-found alignment.
Except… that doesn’t happen! You may appear to have a grasp of loose objectives, only to discover everyone else still has a different understanding. You can still be dealing with fallout from decisions that didn’t have full buy-in months after implementing.
So what should you do to keep your pricing process on track, and gain the confidence you need to move forward?
Gain clarity around pricing objectives
At Kayako, we were introduced to the concept of pricing objectives by Chris Hopf, a pricing consultant, and iterated to find a regular, repeatable process of setting and revisiting pricing objectives that works for us.
We find this process helpful to:
- get everyone on the same page
- set direction
- make decisions
- define success
- (occasionally) defend our approach against new, off-piste initiatives
Before any discussion, the leadership team receive individual spreadsheets, where each row is a pricing objective — you can find the list we use at the bottom of this article.
They are are given 100 points, and tasked with dividing these amongst the objectives they think are most important: the bigger the share, the higher priority. There’s just one other rule — no single objective can be allocated less than 20 points. With this approach, they’re forced to consider which objectives are truly the most important and make tradeoffs.
Make a copy of the spreadsheet we use from here on Google Docs.
When evaluating the objectives, your leadership team need to consider how they will affect:
- strategic company and brand objectives
- tactical objectives
- your customer’s perception
- your organization’s resources
When all the responses are in, we bring them together in one spreadsheet. Tip: if necessary to rid the sheet of “noise”, discard all 20-point awards; if the objective was given the minimum score, then it’s a minimum priority.
We share the results with the leadership team in a structured discussion. The goal? Leave the room with confidence on what pricing should achieve for your business.
Your agenda might look like something this:
- What is the top objective, and does that align with business goals?
- Are there any outliers or anomalies?
- Which objectives are most surprising?
- Can we agree that the two priorities with the highest scores are the most important moving forward?
- What impact will focusing on these two priorities have on the wider business?
Often, within 90 minutes we’ve got the alignment and direction necessary to continue along the pricing process with confidence and clarity at all levels.
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Example pricing objectives
This is an incomplete list of pricing objectives you could use for your business. These are from a variety of sources, so make sure they are relevant before using them in your process.
- Target return on investment
- Target market share
- Increase or accelerate market share (e.g. number of customers)
- Maximize long-run profit (over a year or longer)
- Maximize short-run profit (over the next quarter)
- Grow sales revenue
- Maximize customer lifetime value (encourage upgrades and expansion)
- Maximize customer retention and reduce churn
- Reduce new business pricing objections or reduce sales cycle length
- Simplify for internal/operational reasons
- Stabilize the market / compete on non-price considerations
- Convey a particular image
- Desensitize customers to price
- Be the price leader
- Discourage entry by new competitors
- Match competitor pricing
- Avoid regulation
- Maintain distribution channel support and loyalty (e.g. partners)
- Be regarded as “fair” by customers
- Create interest and excitement
- Use price of one product to upsell other products
- Discourage others from lowering prices
- Quickly recover investment specifically in product development
- Generate volume in order to drive down costs
- Prepare for sale of the business (harvesting)
- Encourage exit of marginal firms from the industry