Here are 7 things I have learnt about product pricing.
#1 If price is your ONLY product differentiator, you are selling a commodity. And if your competitor is much larger than you, you may not have a prayer – they can run you out of town by giving the product away for free.
#2 There is nothing called perfect price. You will either overprice or underprice your product. The key is to test quickly to see what the market can bear, quickly iterate and arrive at your final price. Pick test markets, learn and manage, so that if you do not get it right, you do not have a customer backlash to deal with.
#3 Never roll out pricing increase to existing customers all at once. Why? – see #2.
#4 You cannot increase price without adding additional value for your customers. Customers don’t care about your expenses especially when they have choices. Focus on value you bring to the table for the customer, how it solves their pain points, not your expenses.
#5 You do not have to drop prices if your competitors do. If price is all you have to talk about, see #1. Refocus the discussion to customer value you provide and why the value is worth the additional price. If the customer will not, assess if the customer is worth acquiring. Not all customers are.
#6 You do not have to have single pricing. Promotions to attract new customers, rebates for large volume customers are things to consider only if it makes business sense. Don’t do any of this unless you have a sales strategy in place – what is the end goal for promotions and rebates – new customer acquisition? customer retention?
#7 If you want to price products based on value, think about packaging. Car companies do it – EX, LX, RX; consumer products do – large, medium, small; online services do – Basic, Pro, Premium.
What are your learnings about pricing based on your experience? Please share with me and other readers.
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Software Product Manager by Gopal Shenoy 
proudctmnanageemnttips.com, how do you do it?
Sandesh – I agree – price is dictated by supply and demand.
Pricing your product/ service is purely based on how much competition you have in the market. If there is no competition, you are the monopoly (think Microsoft) – if there is a ton of competition, you are in a commodity market (think pizza delivery).
There are ways (branding/ marketing/ etc.) which will help you differentiate and in a way, reduce your competition and allow you to change pricing the way you want. But still, pricing is directly proportional to competition – you are just re-defining/ eliminating your competition by using tools like branding, features, etc. In other words, the only way for you to increase margins per sale is to reduce competition one way or another.
Very precise observations. My two bits worth:
Ref #2 – I agree with you whole-heartedly. All too often teams get carried away with adding margins to ‘cost price’. This cost plus method gets everyone wanting a larger share of the earnings. Which again translates to the indecision between pricing on actual costs or pricing to be competitive (i.e. against competitor pricing)
Ref #7 – I am not sure that teams realise what “value” really means. Often times value = brighter colours, new packaging, abnoxious collateral and unwanted spam.
Curious to hear your comments on these two specifically…..
Keep up the good work!
– ABat
Thanks for the comment ABat. When I refer to “value”, If you are selling to businesses, value translates to “business benefits” for the customer. How does it affect their bottom line in a positive way?
If you are selling to consumers, the value may not be monetary, but it might be appealing to emotions. In this case, brighter color, new packaging etc. comes into play.
Obnoxious collateral and unwanted spam is not value no matter who you sell to 🙂