Kelly Looney presented a session on pricing strategy at August’s ProductCamp. Here are my notes and thoughts:
Effective product marketing is not about changing people’s minds, it’s about clearly conveying who you are. Your pricing speaks loudly about who you are. It’s something every potential customer pays attention to, so it’s crucial to make sure it’s saying what you want it to. A mismatch between your story and your pricing undermines your credibility – and, for most people, what your pricing says about you will trump what you say about yourself.
Strive for simplicity in your pricing. The time you spend explaining your pricing is time you’re not talking about your product. Also, when your pricing is overly complex, it sets off alarm bells. If you simplify from marginal pricing (extra cost for each additional byte, for example) to tiered pricing (same cost for 5,000 to 10,000 bytes), customers might be paying more and be happier because they can predict costs and not worry about small decisions they make impacting their outlay. Ultimately, if customers don’t like your pricing, it opens the door to competitors.
Creative pricing can increase revenues. Here are a few examples:
- Cheating customers. Companies that sell software licenses based on the number of users can deliberately allow companies to go over their user limits. As more people use the product, it becomes more entrenched and harder for a competitor to oust. You can then go to the company and say, “You’ve paid for 25 users and here is data showing that 150 are using the product.” 15o-person license = sold.
- Loss leaders. Companies can sell printers at a loss because that gets them in, and they make money from subsequent ink sales. Supermarkets can sell diapers at a loss because diapers are such a frequent, high-cost purchase for families with young children that they will make shopping decisions based on diaper prices. Once they’re at the supermarket with the cheap diapers, they do all their other shopping there.
- Psychology. No discussion of pricing would be complete without mentioning Walmart. The company has successfully marketed itself as THE low-price retailer. It’s customers wander its sprawling supercenters and load up their carts because they believe they won’t find any of those products cheaper anywhere else. It turns out, Walmart sells more of a product if it’s priced $1.04 than $0.99. Why? A price of $1.04 seems like Walmart has squeezed the price as much as possible, whereas $0.99 is a ubiquitous price that doesn’t play to customers’ psychology.
Don’t ever put a barrier to people using your products. Let customers test your value before asking them to buy – whenever someone buys something, they’re making a bet. Do what you can to reduce the perceived risk, and you’ll increase sales. One of the customer’s most common concerns about the ‘bet’ is that he’s paying too much. You must address not only competitive offerings, but also the ever-present alternatives – do nothing and DIY.
When pricing your product, therefore, consider the following question: How costly is the problem to the client? The answer will be different for each customer; in fact, the problem may very well be different. You can tailor your offering to through smart segmenting, bundling, and unbundling of products – and with pricing that makes sense to the customer.
What does your pricing say about you?