The other day, at #LeanCoffeeTO, we discussed pricing. This is a subject near and dear to my heart as it is something I spend a lot of time on and have realized, much to my chagrin, there is very little science to this and a lot of art. We decided after our meeting, with lots of great ideas, best practices, stories, pitfalls, etc that we should all post our approaches and practices to pricing in order to formulate a more extensive list for reference. I’m doing it here on my blog with the hopes that I might actually generate some more discussion to a larger audience than our weekly meetup. Here I go…
Working for an Enterprise software company with a mature application and a lot of long standing customers puts some specific constraints on the exercise of pricing (or re-pricing and/or developing new but related product pricing). As such, many considerations that I have to make are not relevant to those of you developing entirely new products or services and trying to figure out how to price them for the first time. Still, I think a lot of factors are the same, regardless of where you are in your product lifecycle.
This will be a list in no particular order that I may choose to re-order when I’m finished but I may not depending on how much time I have.
- Anchoring – always be aware of the power of anchoring a number in people’s minds. If it’s the first time you’re introducing pricing for your product/service, then the first thing you put out there will become a strong anchor in the minds of your users and customers. Like it or not, and unless you creatively re-invent your product at a later date, the first price is the baseline for comparison going forward. Often, the anchor is set by someone else so of course you must also be aware of that in any pricing exercise.
- Customer value – pricing based on value is extremely hard but important to attempt in your analysis and research. I believe there are really two types of value approaches: (1) The perceived value of the customer and (2) a more quantifiable value based on a ROI style of analysis. I recommend considering both of these when developing pricing
- Cost – of course it’s imperative that you understand your costs to develop and deliver your product or service. Still, I personally don’t recommend taking a full “cost-based pricing” approach, especially if you’re selling a web/mobile/software application. Just make sure you understand your costs to build and support but remember your customers don’t care how much it cost you to build it.
- License/Packaging/Delivery models – these are all important factors in your pricing development. I suppose they are less about coming up with the price and more about providing some options to create different price points. For example – pricing the base offering and layering on features/options for an additional cost; bundling options; tiered pricing based on volume or length of commitment, etc…
- Competition and market forces – obviously
- Branding – you must know ahead of pricing (and this goes back to the value concept above) what type of brand you or your product is. Pricing is a major component of branding so be careful here.
- Product market – you must understand the type of market you are in for your specific product or service and the existing price points and pricing models being used in that space (remember anchoring)
- Pricing market – similar to “product market” you must also understand the price points and models already established in the larger, more general market. For instance, app stores have indirectly set ranges for mobile apps, regardless of the specific product type and/or value. This is certainly not always the case but it must be considered. In my experience in the Enterprise Software space, when looking at subscription-based pricing for a SaaS products, Salesforce.com has really established a precedent and must be factored into pricing decisions for other SaaS products whether they compete with Salesforce.com or not. Again, this is very much due to anchoring and the creation of a perceived price point that users are willing to pay based on a different product/service they already pay for (or have seen and decided not to pay for).
This is not an exhaustive list but hopefully provides some useful ideas for consideration, especially if you’re doing pricing for the first time. Please forgive the fact that many points are strongly related, verging on being repetitive. I’m also hoping to learn from those of you who wish to start some discussion around this expansive topic.