First published on NoCMO, in early 2016.
Every early-stage business owner asks themselves at some point, usually sooner rather than later, “How much should I charge for what I’m selling?”
The price of your product is a crucial part of your go-to-market strategy, and not doing the right research can result in lower sales than expected.
Of course, if you’re pre-launch, your pricing will be based on a lot of assumptions, but asking the right questions during the process could reduce the error margins and get you closer to the right price for your product or service.
It would be wise not to approach this process by yourself. Since pricing is a matter of opinion, you should request the input of other people. Ask your team to join the discussion even if they’re not marketing oriented and have zero experience in launching a product. Their input could be highly valuable nonetheless.
Before You Dive In
You will find that many of the questions below require you to already have a sense of your brand’s values and character. That’s because pricing is an indispensable part of your branding process.
To be clear, this article is about how to price your main product or service. After you do that, there are tons of pricing strategies to employ that will serve your goals (i.e., Decoy Pricing, Odd Pricing). This article is also not about what you should charge (i.e., users/usage/features). We’ll address both of these items in a later article.
Let’s go over the questions you must ask yourself and your team when deciding how to price your product:
What is the main feature/benefit of your product? That thing that should make users buy?
This is always the first question to ask yourself when approaching pricing and is the core of your product, your MVP, that basic benefit your solution or service is providing.
You probably already had an answer to this question when you came up with the idea or started to develop the product, but as it often happens, your product could have evolved in the process with new features that will alter the answer to the above question.
Take a few minutes to filter out the clutter and try to focus on the benefits (not the solution) your product or service provides. For example, if you have a customer support product, your main benefit wouldn’t be ‘customer support for businesses’ but rather ‘an easy and simple way to manage and answer clients’ concerns.’
How much is it worth to your clients?
This might be obvious, but I suggest you raise this question anyway. In order to get an idea of how much your solution is worth to customers, ask yourself the following questions:
- How much money would your solution save them?
- Are you saving your clients X amount of hours per month? How much are these hours worth to them?
- Is your product something that has many alternatives and is easy to replace?
- How deeply would your product affect your customer’s life right now? How about their future?
If you’re not sure how to answer these questions, you can try to run a short survey between your potential clients, describing your solution and ask how much they would pay for it. Keep in mind that survey answers tend to be a bit more optimistic than reality, meaning that once they actually need to spend that money, clients will be less inclined to pay what they initially stated.
How much are your clients used to paying in your industry and where does your price place you in your niche? Is your product or service affordable or premium?
Research your direct and indirect competition. Understand how much clients are spending in your niche and set yourself a range. This is probably the actual range in which you should work. You can go lower or higher as a strategy of course, but usually, it’s a good idea to stay within this ballpark range.
Do you want to be seen as affordable or as a premium service? Your branding strategy should have an impact on your answer.
If you’re offering a completely new solution or creating a new niche, this is much harder to do, but it’s still wise to find what similar companies with solutions targeting the same audience have done regarding product pricing.
For example, there’s a huge trend of new products in the analytics-to-the-masses niche (for example Popcornmetrics, kilometer.io, etc). Up until recently, most analytics products were targeting big enterprises. So what I assume these new companies did when approaching the masses is to find out what online marketers are willing to pay for their software and tools, like SEO or PPC tools.
Is there added value in a low pricing strategy to disrupt the industry?
When entering an existing market, there could be a huge benefit in disrupting the industry in terms of pricing. If you’re able to offer the same or similar solution for $10 that other companies sell for $50, your product could catch fire and gain a nice chunk of market share before your competitors have a chance to adjust.
Keep in mind though that it’s a difficult process to increase prices once the market gets used to your low prices. One way to tackle this is to offer your low price for an unknown, limited period of time and make sure you communicate it well to your clients. Some startups use the ‘Beta launch’ technique (Gmail, offering the service for a low price as long as it’s in Beta, but without communicating when they expect to exit the Beta stage, which can take years.
How do you justify a high price?
If you’re considering a pricing strategy of going high and charging more than your competitors, how would you justify the high price to your users? What do you offer that your competitors don’t? What’s the main benefit to users? If you have followed the order of questions in the article, you should already have an answer to the last one.
This is a crucial question to ask because setting a high price without justifying it to your users would probably induce them to go with other, more established premium solutions in your niche.
To whom and how will users compare you based on the price?
There are probably a few different kinds of solutions in your niche. Some are setting their prices high, marketing themselves as premium solutions. Others prefer to set the price low and market themselves as basic/approachable/simple solutions.
When setting your price, you need to consider who your users will compare you to, and what that means for you. Your pricing will communicate to your users who you are competing against in your industry. Do you want to compete against premium solutions or the basic ones? Or should you aim for the middle range to avoid this comparison?
In some situations, you might be able to find a price that makes it hard for users to compare you to others. For example, I just finished a pricing process in a niche where solutions are found around the $100, the $600, and the $1500 price points (one-time fee). Avoiding comparison wasn’t our only factor in this decision, but we decided to price our product at $400.
How do you package your product?
Since there’s so much to cover on this topic, we’ll create a different article on that next week. Until then, if you’re in the middle of the process, keep these questions in mind:
- Do you have more than one solution for the same need?
- What do you charge for your solution?
- Can your solution be broken into smaller parts to be sold separately or as a basic product plus upsells?
- Will it help to offer your solution for free at first?
The pricing process is not easy, and mistakes will be made. As always, the key is to keep testing and ask for user feedback.