Guidelines for Pricing your Product
Loading ...Product Pricing is more than a trade-off between volume and margin. The knee jerk reaction of most Indian software companies is to price low. However, price too cheaply, and you risk your positioning – do you want to be positioned as “cheap” in the prospect’s mind? Products rarely win by pricing low. On the other hand, would you dare price higher than an established, brand-name competitor? Devil’s choice? You bet! Here are some guidelines to help you make a more balanced decision.
Pricing Decision Factors
Smart marketers know that Pricing is much more than an economic decision. Sure, optimal price is an optimal balance between volume and margins. Economic theory tells us that prospects will evaluate value relative to price, and therefore, lower price implies higher relative value.
However, standard economic theory misses out on the information value of pricing – prospects use price as a surrogate for value or quality of a product. A cheap product is perceived as such. Webster’s defines “cheap” as “of very low quality”. Conversely, when something looks good, we call it “like a million bucks”. What would you like your price to tell your prospect about the quality of your product? The question is not just emotional – a lower positioning will actually hurt your sales (Would you use cheap backup software? Or a cheap engine oil for your car?).
This leads to an interesting conflict:
Economics: lower price = higher relative value
Perception: lower price = low value
The key to balancing the economic and marketing considerations is to dig deeper and examine the considerations driving your prospect’s decision. When we look at cost from the buyer’s (rather than the seller’s) perspective, the picture changes completely.
TCO rather than Price
To the buyer, what matters is total cost, which includes your price and all supporting software, hardware and training costs, and the cost of disruption.
Therefore, it is more correct to say:
Economics: lower TCO = higher relative value
Perception: higher price = higher value
Interestingly, you can increase price and reduce TCO, creating more value for you and your customer, at the same time! The key is soft costs.
Soft costs are often ignored in TCO calculation. The two major soft cost components are: Cost of disruption in the client’s operations to adapt your software; and Risk, especially unknown risk, of failure (of product or vendor), disruption, or loss of functionality. Since these costs are high, hard to estimate, and span the enterprise, an unknown product will rarely win in the marketplace unless it provides disruptive value.
Operationally, what this means is that you have to reduce total cost, hard and soft, real and perceived.
Disclaimer: in all of this, I have assumed that you are working with a superior product. The techniques focus on trying to convert product superiority to higher sales and profits. None of this will work if you have a me-too product.
Start by reducing quantifiable TCO. A lot of your product management and R&D should be focused on reducing the hardware, software, and support cost for the client. This is the major value proposition of SaaS. (As an aside, one of the barriers to sales of a SaaS offering, especially from unbranded vendors, is that it increases the perceived risk due to loss of control).
Here are some ideas on reducing the soft costs:
- Make your product visibly simpler to deploy. Simplify the interface. Adapt standards. Integrate with popular packages. Position yourself as easy-to-use and support-free.
- Develop a premium positioning. Focus narrowly – you increase your chances of being perceived as a specialist and therefore better and safer. Establish a thought leadership positioning by contributing to industry forums and blogs. Get endorsements from credible commentators (customers, analysts and industry figures).
- Price Higher. Ironically, a higher price creates a lower TCO. Provided you have a disruptive high quality product, a higher price supports a premium positioning, thereby reducing perceived risk and hence TCO for the product. This is a win-win situation for you and the client.
Operationally,
- Start with a higher price, and lower over time, as you increase volume. Basic economic theory states that demand increases as cost falls. Initially, as your volumes are lower, you can price higher. As you expand your market, reduce prices.
- Resist getting into a price war, unless you have a fundamental, sustainable cost advantage, which is extremely rare.
- Benchmark your price against established competition. If you can back a significantly higher positioning so that you are almost in a different category, price above the competition. Else, price slightly below to make price a non-issue. Another good and very commonly used technique is to list price high, and discount to close the sale. Do not under-price more than 10%, however, else you will confuse the prospect with mixed signals – while your marketing message will convey a premium positioning, the price might negate it.
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