Understanding Product Pricing
Strategies That Work!
Hello, all you product-loving folks! 💜
Welcome to this week's edition of Product Café, your weekly cup of coffee for everything: product management, startups, AI, and more. ☕
Ever felt stuck trying to figure out the best price for your product? It’s pretty common. We all end up guessing a bit when it comes to pricing. It's like a mix of math, science, and a bit of guesswork. And sometimes, there's no clear answer except maybe "make sure it costs more to buy than to make." But even that simple rule can get tricky when you're trying to grab a piece of the market early on.
Have you thought about checking what others are charging and setting your price a little higher or lower? If it’s too high, people might walk away; too low, and they might not think it’s worth much.
And what about deciding between a freemium version and a fully paid version? We all wrestle with these kinds of decisions when we’re planning.
So, how many ways can you actually price something? You might know a few already. Let’s dive into how different companies use different pricing ideas to their advantage.
Cost-Plus Pricing
An excellent example of cost-plus pricing in action is Oracle Corporation. Oracle employs a cost-based pricing strategy for its extensive enterprise software products and services.
They calculate the costs incurred in developing, maintaining, and enhancing their sophisticated software offerings, including database management systems, cloud solutions, and various business applications. This cost calculation forms the basis of their pricing, to which they add a margin that ensures profitability while covering all aspects of service and product delivery.
This pricing model is all about simplicity and ensuring business sustainability. It’s straightforward and transparent, making it a favored choice for businesses that cover costs and achieve sustainable profit.
Competitive Pricing
Let’s look at Hulu. They checked Netflix’s prices and decided to set theirs a little lower. Why? Hulu has fewer original shows and includes ads in their cheaper plan. By pricing lower than Netflix, Hulu attracts customers who want to pay less but still enjoy watching shows. This approach is about spotting competitors' charges and setting your price to attract customers.
Value-Based Pricing
Consider Slack. It’s more than a messaging app; it helps teams work better together. Slack has different plans based on what teams need. They charge more for extra features because these features help teams a lot. Pricing this way means you set the price based on how valuable people think your product is.
Dynamic Pricing
Look at Uber. They change their prices based on the number of people needing rides and the number of drivers available. For example, during a busy rush hour or when it rains, prices go up because more people want rides. This helps keep the balance so that everyone who needs a ride can get one.
Freemium to Premium
Spotify lets people listen to music for free, but the free service has ads, and you can’t listen offline. If you want no ads and offline music, you have to pay. Starting free helps Spotify get a lot of users, and some of them will pay later for better features.
Penetration Pricing
When Adobe first offered their Creative Cloud service, they set the price really low. A lot of people signed up because it was affordable. After many people joined and liked the service, Adobe raised their prices. This strategy helps get a lot of customers quickly, and then the prices go up later.
But how do you decide which pricing strategy should you choose?
It might seem tricky, but it really boils down to understanding your market, your product, and your customers. Here’s a simple guide to help you make that decision:
Know Your Costs 💰: Before anything else, figure out how much it costs to make and deliver your product. This is your baseline. You can't price below this without losing money.
Understand Your Customers 🧍🏻♀️🧍: What do your customers value the most? Are they looking for the cheapest option, or are they willing to pay more for something special? Knowing this helps you decide if you should compete on price or quality.
Check Out the Competition 🔎: What are your competitors charging? This gives you a benchmark. If you charge much more than others, you’ll need a good reason why your product is worth more.
Consider Your Brand 🤑: Your pricing also says something about your brand. High prices can signal high quality, while low prices might attract more customers but give a different impression about your brand’s value.
Think Long-Term 🤔: Are you looking to make a quick splash or build a loyal customer base over time? Your pricing strategy can influence this.
Flexibility 💪: Markets change, new competitors emerge, and customer preferences shift. Choose a strategy that allows you some room to adjust prices as needed without shocking your customers.
Remember, no single strategy fits all situations. Sometimes, you might even combine strategies. For example, you could start with penetration pricing to draw customers in, then move to a value-based pricing model as they become more attached to your product.
An Effective Methodology
One effective method to systematize this process is Van Westendorp’s Price Sensitivity Meter (PSM), a pricing framework that utilizes both qualitative and quantitative research to pinpoint a suitable price range. This approach asks four critical questions to gauge consumer perception:
Too Expensive: At what price is the product so expensive that you wouldn’t consider buying it?
Too Cheap: At what price is the product so cheap that you’d question its quality?
Expensive But Considerable: At what price does the product start to seem expensive, but it’s not entirely out of the question?
Great Value: At what price does the product seem like a bargain—a great buy for the money?
These questions help you explore different pricing thresholds from the customer’s perspective, providing insights into what consumers consider too expensive, too cheap, or just right.
Source: https://productcoalition.com/the-4-biggest-mistake-in-product-pricing-9e7f2c28e782
Let’s now look at some psychological aspects of pricing, shall we?
Understanding the psychology behind pricing can turn a mundane pricing page into a compelling buyer’s journey. Here are some clever strategies SaaS brands use to subtly sway customers:
Category Heuristics Bias: This bias simplifies decision-making by reducing the cognitive load. For example, Trello breaks down its pricing by clearly defining what each tier offers, from individual use in their Free plan to extensive collaboration features in their Standard, Premium and Enterprise plans. This setup helps users quickly navigate through options without getting bogged down by unnecessary details, directing them swiftly toward a decision.
Center-Stage Effect: Most people are drawn to the middle option because it feels "just right." Intercom capitalizes on this by placing its most popular plan smack in the middle, making it an automatic go-to for new subscribers looking for the best value.
Bandwagon Effect: "Everyone’s choosing this, so it must be good!" Grammarly uses this to great effect by highlighting their Premium plan as the most popular—it's like getting a recommendation from thousands of users.
Decoy Effect: Here, a strategically placed less attractive option makes the target choice more appealing. Shopify uses this on their pricing page, where the Shopify plan is sandwiched between a Basic and a significantly more expensive Advanced option, making Shopify appear more valuable in the context.
Loss Aversion Bias: Focused on our fear of losing out, this bias is skillfully used by SaaS platforms to promote longer commitments. Notion highlights its annual rate by showing substantial savings compared to the monthly fee, tapping into the customer's desire to avoid the 'loss' of paying more over time.
Charm Pricing: A subtle yet powerful method that ends prices with a 9. This old marketing trick still favors persuading customers, as seen with Semrush’s subscription plans.
So…
It is important to keep in mind that your chosen strategy isn’t set in stone. The landscape you operate in will change—new competitors will arise, and customer preferences can shift quicker than mood swings! Stay flexible and be ready to adjust your prices based on new data and market feedback. Regularly revisiting and refining your pricing approach is key to staying competitive and meeting your customers’ needs.
By following these steps, you can choose a pricing strategy that not only meets your business goals but also resonates with your customers. Remember, the right strategy is one that balances costs, demand, and value, ensuring that your product is positioned for success in the marketplace.
Also Read:
https://www.hop.online/blog/pricing-pages-for-saas-6-psychological-hacks
https://bootcamp.uxdesign.cc/the-art-of-product-pricing-a-guide-for-product-managers-a9bb359f60f9
https://jproco.medium.com/your-products-pricing-is-probably-the-problem-182000c42f5a
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That’s all, folks! Have something you want to share? Put them in the comments below, and we’ll get back to you soon.
See you again in the next edition! 🥂
