Setting the price can be one of the most difficult parts of taking your product to market. If you go too low you risk undervaluing your product. But if you go too high will you be seen as not worth it or too high-end?
Not only does cost signify your value and positioning to your buyers and competitors, it’s also not something that can easily be changed once you make a decision. It can be tempting to just make a gut decision and then alter that pricing later down the road once you bring in customers, but changing your price at any point is no small task.
A change in price will impact the customers you’ve already brought in, as well as your reps and marketers who communicate about your product to customers. Because of that, it’s critical to not only price your product correctly in the long-run, but get it right the first time around.
In order to make that happen, there are four different elements you want to make sure you’ve considered during your decision-making process:
1. Strategic and Business Goals
One of the most important considerations when thinking about the price of your product is to make sure that the price point aligns with your company goals. Everything you do should align with who you want to be as a company as well as how you want to get there.
If you are trying to enter a new market, you may be tempted to use a lower price point in order to get a large number of customers quickly. However, if your offering is not a mass-market product or you are hoping to eventually position it as a luxury-style product, that’s probably is not the right pricing strategy for you.
Setting the right expectations around your product’s price from the start will ensure that you bring in the right type of customers from day one rather than acquiring a large number of poor-fits.
Thinking for the long-term will help ensure higher customer retention and company growth. It will also help you avoid many issues down the road that require pricing and product adjustments like high churn rates.
2. Buyer Personas
The next most important thing to consider when making any decision related to your product or positioning is the people you are selling to.
You need to have your ideal customer profiles and buyer personas mapped out so that you can make sure the price point you are considering is right for the individuals who will see the most value from your product.
“Consider who has the most willingness to pay and the most willingness to buy,” says Guido Bartolacci, Head of Product at New Breed.
Oftentimes companies with larger budgets will have a higher willingness to pay for something in comparison to small- to medium-sized businesses. On the other side, some types of companies will have a higher willingness to make a purchase because they will need your product more than others, but they may not have the budget to do so as freely as larger companies.
In either case, understanding the people you are trying to convert into long-term customers will allow you to choose a price point that fits their needs and budget capabilities while still generating you a profit.
3. Your Pricing Structure
Your pricing isn’t just one flat number across the board. There are many different layers and options to any pricing model. You need to consider whether or not you will offer discounts, have different levels or tiers and what terms you will offer to your customers.
At many companies, pricing structure involves different tiers or models that customers can choose between.
Will your pricing be tiered, a-la-cart or freemium? The answer to that question often differs based on industry as well as the specifics of how your product works and operates. Regardless of decision, you want to be sure your pricing model is set up to fit not only customers who initially buy, but who will grow with your product as well.
Understanding your value metric can help you determine the most appropriate pricing model.
“Your value metric is the metric that best correlates with where your buyers see value in your product,” says Guido.
In other words, it’s the thing about your product that makes customers keep coming back. An easy example of this is an email automation software company. This company is most often going to have users paying based on the number of contacts they store, thus making their value metric contact storage. They can then build their pricing strategy around that value metric. For instance, maybe tier 1 is $100 a month for 1,000 contacts, tier 2 is $150 a month for 2,000 contacts and so on.
Understanding your own value metric is an important piece of your pricing, especially if you are going to use a tiered system as your price tiers will be based around that value metric.
“Your net terms are how long you will offer contracts to customers when they purchase your product,” says Guido.
If you can get someone to commit to a five-year contract that’s great, but that probably is not going to be the case for most companies.
“Your pricing contract, or net terms, have to align with the value of the product they are purchasing,” says Guido. “Your customers need to be able to realize value well beyond the price of your product within that initial contract.”
For a lot of companies who offer month-to-month pricing, they are able to do this because their solution has a short time to value, and they can count on buyers being able to realistically make a real decision to renew or not renew in that amount of time.
If you were to put one month on a product that takes six months to a year to see real value from, then you may see customers churn because they are reviewing the cost of your product before they can validate spending it again.
You should also think in advance about if you’ll offer discounts. If so, how much will you discount? What is your policy around offering discounts?
Discounts for customers who are purchasing multiple products from you is also an option. This can be a great way to get customers to purchase more from your company as well as allow them to try out multiple products or services at a discounted rate.
Regardless of what decision you make on discounting, determining these elements before launch will make sure your pricing is fair across the board. It will also help your sales team do their job as transparently as possible when questions arise in the sales process.
4. Your Competition
You cannot neglect competitors when it comes to your pricing strategy. First and foremost you have to understand what your competitors are charging for a product that is similar to yours.
“If you are charging way more than your competitors then you will be seen as a luxury product or a high-value brand,” says Guido.
This isn’t necessarily a bad thing, but it should be a major factor in how you bring your product to market and how you want to be perceived.
Your competitors will also tell you a lot about what is accepted in your industry in terms of pricing. While you don’t have to stick to the status quo, you should be mindful of how you are positioning your product by pricing your product differently and at the very least you need to be prepared to back that price up with your value prop.
Pay attention to the way your competitors are pricing their product in terms of how visible they make pricing and the way that they bucket or tier their pricing too.
Being aware of these things will help you position yourselves against your competitors better even if you go with a different pricing mode. This will also help you to better predict conversations that may occur with potential customers who are looking at or vetting some of your competitors.
Pricing your product isn’t easy and although you shouldn’t constantly be making adjustments to your pricing, it doesn’t mean you can never change it in the future. But, a huge part of launching your product successfully is the way you price it.
Pricing is just one critical element of your go-to-market strategy. That strategy also includes things like creating your value proposition and developing a marketing and sales strategy. For a full scope of what goes into a go-to-market strategy and helpful links checkout our Go-To-Market Checklist below.