A not-so frequent topic for Mind the Product is the pricing strategy for your product and how to get it right. With help from product and pricing experts, we discover the key fundamentals for successfully executing this part of your product strategy.
A pricing strategy is a model or method used to establish the best price for a product or service. It helps you choose prices to maximise profits and shareholder value while considering consumer and market demand. What role do product managers have to play in getting this right?
The role of a product manager when creating a pricing strategy
When setting a pricing strategy, the product manager’s role sits between the three disciplines of product marketing, sales and customer success. Their level of responsibility varies depending on company size and industry. Organisations can benefit from the product teams’ insights on what the pricing strategy should look like, and what value customers will gain from the product, Paul van den Broek, Head of Product at Coosto explains: “The main relation between price and product management is determining what value are you offering and what price it represents.”
It’s imperative that all teams offer insights and opinions to construct the most effective price options, so collaboration is key. Paul adds: “You can’t make a pricing product decision without having a buy-in from customer success and sales perspectives.”
How to get started
Why: Why will customers want to pay for your product? What are you trying to achieve as a business by adding a pricing feature? “Do you want to be the best in the market, the most premium, or a cheaper option?,” Marcos asks. Asking these questions can help to establish your price range compared with the rest of the market.
Who: Once the ‘why’ is figured out, it becomes easier to position your product. You can then decide which customers you want to target and why. Who are these customers and what price range is feasible?
Experience: The third step is to solidify what experience you want to provide for your customers. How do they achieve the goals of the product, and how does it help customers achieve their goals if they invest in it?
What: What parts of your product do you monetise? How do you deploy pricing to your customers? Once you have focused on the why, who, and what experience you want to offer customers, it becomes more straightforward to determine your pricing model.
Paul adds that “you must find the value that customers will gain from using your product. It can be challenging to quantify your product value, and determine what price will trigger customers’ impulse to invest in your product, but asking this question will set you off in the right direction”.
Determining your pricing model
There are several models that you can use when pricing your product. The most popular model that many B2B companies follow is a straightforward pay-as-you-go option, where companies pay for a product or feature for as long as they endeavour to use it. B2C organisations, tend to inherit a ‘good, better, best’ tier model. For example, if you’re in a supermarket looking for an item to purchase, there are many products that offer ‘small’, ‘medium’, and ‘large’ options. Many organisations offer this structure, from content paywalls to video streaming subscriptions.
Finally, many companies follow a pricing strategy purely based on the customers’ needs. This can give the user a free roam to pay for a specific product or service depending on their specific situation. The most noticeable is used for mobile phone contracts or electricity/broadband services where every use case varies.
Once you have determined one of these pricing models, focus on your pricing metric. “The question about what you’re charging for is one of the most important questions to ask yourself during your pricing strategy journey” he adds.
You also have to consider how you license your payments and your go-to-market plan. Says Marcos: “Do you allow for discounts? Will your service be completely product-led? Do you give in-app credits?.” All of these small areas can have a huge impact on your overall strategy.
- Pick one of the five structures that create the foundation for your pricing strategy
- Find out how you would like to monetise your payments
- Focus then on the licensing and go-to-market plan
How often do you check on your pricing model
Markets and users fluctuate, so how do you ensure that your pricing model continues to be effective? Marcos likes to look at his pricing strategy based on the cycle in which people arrive and use the product. For example, if your product follows a process where users can trial and instantly start using the service within 24 hours, then you have to reassess your pricing model more frequently. “This ensures that you’re charging for the right things and your paywall limits make sense,” he adds.
However for larger product and sales cycles where your data sets are less frequent and consequently, smaller, you might visit these on an annual basis. “I like to keep things simple when tracking metrics,” Marcos says, “On an annual basis, you should be looking at all of the new customers that you want to reach, all of the customers that have grown with you, and all of the customers that have left. If you take note of all that information, then you can use it to be smarter in the next year,” he explains.
Marcos adds that if your strategy doesn’t seem to be performing well in the first month, give it at least a few more to avoid any impulsive changes. Paul agrees that checking up on your metrics every quarter is a good rule of thumb, however, this also depends on what stage your business is at. Paul also adds how important it is to be reactive and flexible to your pricing strategy: “If you have three tiers, small medium, large, for example, and you see that after a quarter, 90% of your customers buy your products based on large tier, probably you’re too cheap and it may be time to reevaluate.”
Dealing with turbulence
With several large companies announcing tech layoffs, the cost of living crisis impacting individuals, and many more external issues, there are a number of factors that can influence your pricing strategy. Naturally many people and businesses are reevaluating their expenditure.
It’s important to consider whether your product or service has options for users to upscale or downscale in these cases. “What mobility do you have in your model?” Marcos says, “having this flexibility can prevent users from simply opting out of your product.”
Finally, Marcos says to consider whether your pricing has the potential to cause friction in the first place. Reassess what the true value of your product is and consider how customers feel about paying for it in the first place.
Product managers have a key role to play in dictating the pricing strategy of a product or service. Offering your viewpoint can create valuable takeaways of what customers need, what companies should build, and what problems they have, so having an understanding and input into a company’s pricing strategy is an essential part of its future success.