Marcos Rivera, is the CEO of Pricing I/O, an Award-Winning Author of the book “Street Pricing” and a sought-after slayer of bad pricing.
Of the businesses I’ve worked with, 3 out of 4 guessed when it came to pricing their products. Some decided to go with a “tweaked” version of a competitor’s pricing model, while others flat-out made it up.
What’s the big deal, you might ask? Let me answer with a question of my own: Do you want 100% of your growth to be based on guesswork?
I’ve been pricing products and services for over 25 years and have seen firsthand the impact of guesswork. A poorly calculated guess on your pricing can lead you down a long, painful path to stay afloat. In comparison, a pricing model based on simple packaging and real customer feedback can lead you to the promised land.
Whether you’re starting a new business, launching a product or revamping your pricing for the first time, here are five questions to ask yourself to avoid resorting to guesswork:
1. How does our end-to-end experience compare against competitors?
You’ve worked hard to build your brand and value, so it would be a shame to let your competitors decide how much your products or services are worth. The key is to break down the customer journey into phases— discover, activate, purchase, upgrade or something similar—and understand how you stack up in each phase. Once you land on your position in the market, pick a pricing model that accentuates your strengths.
For example, maybe your discovery phase is more in-depth than others, but your activation offers the quickest time to value in the industry. This position lends well to a premium-priced product with an easy entry point to upsell over time.
2. Which customers can we serve better than anyone else?
Some customers will love you more than others, so love them back! Find customers with more users, high satisfaction or heavy adoption, and dig into their motivations. Maybe you serve high-touch customers faster and more cost-effectively than the next best option. This means you should price to appeal to this target group the most, then tier from there.
3. Which value do we want to capture?
This one requires a firm look in the mirror, but the right feedback from the right customer will help you figure out which value you should capture. You might decide to give away a free diagnostic to charge for services, or maybe you decide to give away integrations in order to charge for data or offer free access to charge for transactions. The key is to price your value on purpose; this includes things you choose not to charge for.
4. How often do customers push back on our prices?
This is where it gets tricky. Some customers might think you’re expensive, while others might signal you’re a bargain. A solid position and a clear target customer will guide you to pay attention to the “right” pricing feedback. If your target customer frequently pays the full price with a smile, consider a price increase. If they always ask for a discount, then revisit the price.
For new products or startups, you’ll need to interview your target customers to assess how much they think it’s worth for you to solve their problems. Shoot for at least 30 responses before considering your price, and avoid the “finger-in-the-air” approach.
5. Can we explain our pricing and packages to a 10-year-old?
Keep it simple when it comes to pricing. Now that you affirmed your position, sharpened your target customer, decided which value to capture and measured price sensitivity, the last step is to make sure you have a pricing model that people can understand.
For example, too many options can confuse the buyer, while too few options can lead to a “one-size-fits-none” experience. Stick with at least two but no more than five options and charge for something familiar to the customer. In other words, don’t make them think so hard!
Conclusion
Asking yourself these five questions will help pave the way toward designing your pricing and packages with intention. Take these steps as you answer each question to get started with pricing without the guesswork:
1. Get crisp and tangible about the impact of your value versus alternatives; framing is everything!
2. Talk to your customers and prospects (yes, even the losses) to probe into what they value most/least and how price factors into their decisions.
3. Decide which value you want to capture or give away (e.g., trials, diagnostics and content).
4. Craft a price that reflects a 10 to 15 times return on investment for your customers, but ensure you are still competitive in the market and can operate with a healthy margin.
5. Keep your packages/bundles simple to understand; less is more, especially in the early days.
Are you ready to ditch the finger-in-the-air approach and price your products on purpose? My guess is as good as yours, but I hope you are!
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