Everyone wants a bargain
Price can be the make-or-break factor for businesses. It can determine whether they just scrape by, stay sustainable, or actually thrive. As individuals or businesses, we all want to charge the highest price possible for our products, no matter how awkward it may seem. After all, it’s a go-hard or go-home world. But what’s on the other side of that price? It’s the people who will pay for your service or product and keep you in business. That’s why it’s so important to set a price that both balances profitability and considers the ability of your customers to pay. This article will explore pricing, who should be responsible for setting prices, the different pricing strategies available, and what you need to do to ensure you’re setting the best price for your products.
Who should take ownership of pricing?
In a business structure, particularly, services or products with subscription models, there’s always the question of who should determine the price. The answer is simple — it should be the person or team with the most knowledge of the market and background information. In practice, it’s all about knowing the cost of production, analyzing wins and losses, and gathering feedback from customers to come up with the perfect price. This information can be held by different people depending on the company. Sometimes it’s the founder, while in other cases it could be the product marketer or the product owner. Whoever has the most information on costs and customer behaviour should be the one to take charge.
If you have ever witnessed an informal negotiation session, you will know how hard it is to find common ground in pricing. The service provider is trying to be cautious not to under or overcharge, the customer is doing all they can to stay neutral and not overpay. It is fun to witness but often, someone feels they could have gotten a better deal when negotiations end. That’s why it’s important to make sure you’re using data-driven strategies to set your price — so you can avoid any regrets down the line.
Everything starts with the baseline
The baseline is the breakeven figure. It is the amount you need to sell all produced units of the product/service within a defined timeframe to recoup the direct, fixed and variable costs. For instance, if within the first three months of product rollout, you envisage selling 2000 units of the product and the total cost (fixed+variable+direct) of production is $100,000. The baseline will be;
$100,000/2000= $50
With a baseline of $50, your product can sell at any price above $50 depending on your desired margin and pricing strategy. It’s important to note that for SaaS companies, the total production cost can include things like engineering hours, cloud subscriptions, and integrations.
How much are my customers willing to pay?
No matter the price you set on your product, the ability of your target segment to pay makes the difference.
“The most important part is to remember that pricing is not about you as a company. It is about what that market has dictated your customers are willing to pay” — Stephen Burg, Global Product Marketing Head at Cyberbit
If you want to make a sale, it’s important to price your product in a way that fits within your target market’s budget. To do that, you need to do some thorough research first. Digging online to find out what your competitors are charging, making sales calls, and listening to customer feedback can all be really helpful in understanding what your customers are able and willing to pay. But remember, you don’t want to just copy your competitors’ pricing. Use what you learn to develop your unique pricing strategy that works best for your product and your customers.
What if it’s a new product without competitors?
Research is still the keyword for a first-to-market product. Asking outrightly means you will get the most ridiculous feedback because everyone wants a bargain. That’s where the Van Westerdrop pricing framework comes in. It’s a data-driven model that helps determine the true intentions of potential buyers. Instead of just asking for one price point, the framework collects a range of prices to get a better sense of what people are willing to pay. Here’s a quick explanation of how it works:
First, the survey questions;
- At what price would it be too cheap that you would be worried about the quality of my product? (Too Cheap)
- At what price would you think my product is a bargain? (Not Expensive)
- At what price will this product begin to seem expensive, but you will still consider buying? (Not a bargain)
- At what price will this product be too expensive? (Too Expensive)
Then the analysis:
The result of the survey is plotted on a graph with the number of respondents on the y-axis against the price on the x-axis. All questions are plotted uniquely as seen in the figure below.
The intersection of the number of people who think your product is “too cheap” and “not a bargain” called the ‘Point of marginal cheapness’ is the breakpoint. Any price below this number and buyers will think your product is too cheap The junction of the number of persons who think your product is ‘not expensive’ and ‘too expensive is described as the ‘Point of Marginal Expensiveness’ and any price above this will have your prospects thinking your product is too expensive.
So what price is safe for my business? The window between the Point of Marginal Cheapness and the Point of Marginal Expensiveness represents the acceptable range of prices. For the less-adventurous people, aim for the intersection of people who think the product is both ‘too cheap’ and ‘too expensive’. That way, you’ll have the least amount of dissatisfied customers.
Although the Optimum Price Point is the price that ensures your customers can pay, as a business, it is important to always maintain sight of the Baseline. The final price selection should consider the price a unit of the product has to sell to breakeven.
Pricing Strategy
There are several strategies you can adopt to develop a product price that helps keep you in business. These strategies cut across brick and mortar to SaaS to hospitality. Also, these strategies are more fitting to some businesses than others. So, let me walk you through some of the most common strategies.
- Cost-plus pricing
As the name implies, the cost-plus pricing has cost at the centre of its decision. It involves adding a percentage of profit to the cost of producing a unit of the product. It is mostly used for physical products as the cost of production can be easily calculated.
In cost-plus pricing, if a product costs $200 per unit to produce and you want to make a profit of 30% on each unit, the selling price will be $260. The downside of this method is that it is not data-driven and is blind to competitors and customer willingness to pay.
- Competitor-based pricing
Competitor-based pricing is a very popular pricing model in the modern business world. It involves researching the prices of your competitors and using that information to benchmark your prices In competitor-based pricing, With several platforms for comparing and reviews, all that is required is to search for similar products and retrieve their prices and offers. However, it is vital to retain uniqueness, do not copy.
This method is popular because it’s quick and as a business, you are sure your target market can pay.
- Value-based pricing
Value-based pricing uses key values of the product or service as the price determinant. For example, 128GB iPhones sell for lower prices than their 256GB and 512GB counterparts. Apple attaches different prices to the differentiator and that shapes the overall price. Value-based pricing requires doing some research into what currently exists in the market and how your product is better or different, then attaching a monetary value to that differentiator. This strategy typically produces various prices for each unique value. The only downside of this method is the time it takes more time, but it often results in more accurate pricing.
- Dynamic pricing
The most evident example of dynamic pricing is the aviation industry. This pricing strategy uses a flexible approach and it is heavily shaped by market demands. However, it is vital to identify and be convinced of the factors that can shape prices that won’t affect the ability and willingness of customers to pay. For example, seats in a stadium will only be at the peak price just before the match and not days before the match. The prices still have to be reasonable to ensure your business is not at risk of appearing too greedy. This pricing is also common on ride-hailing platforms.
As a business owner, it’s understandable that you want to ensure you’re making the best pricing decisions for your brand. It’s important to prioritize research to help guide your strategies. Before setting a price, consider your brand’s position in the market — whether you’re a premium, affordable, or value brand. This will help you determine the most effective pricing strategy. Additionally, it can be helpful to offer different pricing options based on what you believe your customers can afford, ensuring profitability for your business. Remember, it’s okay to approach pricing decisions with confidence. Don’t hesitate to establish a fair price for your product or service.
My personal experience with pricing
I should add this because I might never get to talk about it. But a couple of weeks back, I was opportune to decide on the prices of a range of subscription-based services with the product owner, What helped us make a decision was the balanced mix of research into the product and market. Research into the product helped identify what it offers as value to customers, the research into the market was to get an idea of the prices similar products are sold. Combining both, we were able to develop value-based pricing while noting some details we could trade at the negotiation table if the need ever arises. You might ask why not just remove the ‘tradeoff’, well, you know everyone wants a bargain.
