How to price your product for higher profit and happier customers
An intro to pricing packaging
In my last blog I ran through the importance of pricing (tl;dr it’s really, really important 💸), and some of the methodologies and thinking behind how much to charge your customers.
However, what I didn’t cover was HOW to charge customers — i.e. the packaging 🎁. Packaging is essentially everything else on the pricing page. It can have a major influence on buying psychology, driving everything from conversion to upsell, churn and customer behaviour. As we can see from the Hubspot pricing page, the actual price is only a very small component of the pricing page.
What are we trying to achieve?
With packaging we are usually trying to achieve at least one of three things:
- Increase conversion 📈
- Encourage usage 👩💻
- Profit maximise 💰
1. Increasing conversion 📈
The easiest way to increase conversion is to make the options and pricing structure simple to understand.
The Paradox of Choice is a common phenomenon - for whatever reason, too many options overwhelm humans and we can struggle to make a choice. One way to avoid this, is to offer just 3 or 4 options (or tiers).
To make choosing even easier, the options (or tiers) can be described in a way that makes sense to the customer e.g. Individual, SME, Enterprise, and even spelling out which tier is for who — Slack does a great job of this:
How pricing is calculated (or “pricing units”) is an important part of keeping things simple, whether per seat, per GB of data or per API call. Pricing units should be:
a) Easy to understand
Complication adds unnecessary friction. Units should be clearly aligned with the value the customer is getting, so that if they buy more they get more value.
b) Simple to estimate the overall cost
If the product can be budgeted for easily, it’s far more likely to get internal approval.
For example, if a buyer knows the cost per seat and how many users they’re signing up, with some quick maths, they know how much it will cost them. If they sign up to a usage-based plan but have no idea how much they’ll use it, there is a huge risk for them that they could end up with a massive bill.
Fitting in with existing budgeting plans or creating a highly predictable model will help.
c) Based on industry norms
Often companies will expect a pricing model that is already used in their specific industry, unless there is a good reason it is often easier to price in the same way. Twilio for example charges on a per SMS basis, standard for the telco industry.
2. Encouraging usage 👩💻
Increasing usage in your product is great as it is likely to:
- Increase the value the customer is getting (reduces churn and helps with future price increases — which you should do as much as possible!)
- Actually increase the value of the product (products with network effects)
- Entrench your product in your customer’s operations / workflow (making it harder to switch to competitors); and
- Improve chances to upsell more seats/GBs data/API calls etc.
To increase usage we predominantly want to ensure that our pricing unit does NOT make customers reluctant to use the product, or all the features the product has. If for example Slack priced on a per message basis, users would likely hesitate to use the platform, and certainly post fewer gifs.
Using the Amazon example here again — they’ve really embraced this thinking with Amazon Prime — it provides a huge range of features that are provided as part of the bundle. As customers use more and more features, they are much less likely to churn and more likely to accept future price increases.
Per seat pricing
Per seat pricing can be a good structure to remove any boundaries to using the product. There are also equivalent options depending on the business model — for example, Clever (a platform that centralises learning software for schools) charges on a per school basis. In this case the whole school can use the product as much as it likes.
If a per user fee makes it hard to get a whole organisation using the product, as there is a reluctance to buy more seats, different pricing can be used such as a flat fee. (note this may impact your ability to upsell unless you have other features to sell!).
A pricing mechanism to kick-start usage
One mechanism that can encourage usage (which Clever above also use) is a “3-part tariff”. This involves a base fee that comes with a number of seats (or units) included, PLUS an additional cost per unit thereafter.
Example: $100 / month which includes your first 10 customers after which additional users cost $10 / month.
3-part tariff encourages usage as initially there is no additional cost to adding more seats (or equivalent). Customers also feel this is more “fair” as they are getting something for the base cost and is particularly useful when an implementation fee is being charged. GitHub uses this for their team pricing.
3. Profit maximising 💰
Finally, we want to profit maximise. The 3-part tariff above has usefully been shown to profit maximise. In addition we can also use price discrimination i.e. charging different customers different amounts for essentially the same software. We can charge more for the customers that are willing to pay more, and charge less for customers willing to pay less.
For B2B businesses this usually means separating out individuals, SMEs and enterprise, as enterprise generally have a greater ability to pay. There are other ways of splitting these groups and your ability to do this will depend on your understanding of your customer personas.
Good, Better, Best
A tiered approach as seen in the many examples above tends to take the form of good > better > best, where higher tiers have more features.
This works particularly well when the higher payers need features that the lower payers do not. Example features include 24/7 service support, additional security, admin dashboards etc. There’s usually something SMEs or larger customers want in addition to the base product, so if you’re listening to your customers, they’ll probably have given you the answer already.
There are a few variants to tiered pricing, but most companies (incl. 70% of SaaS companies) use good / better / best pricing as a middle-ground. More complex is possible, but best used when dealing with buyers who have a lot of experience in the product they are purchasing.
There’s no perfect way to package pricing and it should be a cycle of iteration and learning. While pricing always needs to be in the context of your own business, I hope this post helps to prompt the right questions. If you’re looking into how to think about pricing you’re already ahead of the vast majority of companies!
I’ll end with a reminder that you’re probably undervaluing and therefore underpricing the awesome product you’ve built :).
I’d love to hear your experiences — do comment below or hit me up on twitter!