We often think of pricing as something to do right before launching a new product. Maybe it gets a little thought during development, but it isn’t urgent. Now that we’re approaching launch though, we need a price.
Or, sometimes we schedule a pricing meeting to decide whether to change our existing price or, albeit rarely, we schedule a meeting to discuss whether to change our pricing model.
Unfortunately, these pricing conversations occur too late in the process. To create more profitable products and product portfolios, we must incorporate pricing concepts from the outset.
More profitable products
Of course, you want buyers to choose your product instead of your competitor’s product. So you need to know how your buyers decide between the alternatives.
Price is almost always a factor in such decision making. If your product is more expensive than your competitor’s product, people will only buy it if it offers more. But more what? That’s what you need to figure out because every time your buyer decides between you and a competitor, this is how they make the decision. Which one costs more? And is it worth it? “Is it worth it” is all about differentiation.
You must find out what buyers are willing to pay for that your competitors don’t have, then put that in your product. This is differentiation that is extremely valuable.
As a product manager, you have a long list of features to build or market problems to solve. You need to prioritise them. One factor should be willingness to pay. How much more would buyers pay for this feature or solution? Hence, the most valuable differentiators should come earliest on your roadmap.
More profitable product portfolios
So you now know that once you decide which product to build, you have to build in valuable differentiation. But how do you decide which product to build?
Companies rarely launch new products in new markets. So your next product will probably be targeted at your current markets and maybe at even your current market segments. You know these buyers and users well. You also know what unsolved problems they have. You are in essence building a product portfolio: multiple products targeted at the same market.
There are two basic types of products in a portfolio: versions and add-ons. You may have heard your economics professor call them substitutes and complements. Versions are the products your buyers are deciding among. Think good, better, best versions of a smartphone. Buyers tend to buy only one. Add-ons are the options people buy in addition to the base product. Think accessories or apps for that smartphone.
It is critical that we understand how people make decisions within our own product portfolio. That will drive us to more profit. Let’s look a little more at versions and add-ons and how they can influence our roadmaps.
There are two powerful ways to use versions in your product portfolio. The first is to build different versions for specific market segments. Look across your current customers. Some probably derive more value from your product than others and would pay significantly more, but you couldn’t charge more because you still wanted to sell to the other customers.
If this is true – and it usually is – consider creating a different version of the product for this new market segment. For example, Evernote’s premium version, which targets individuals, sells for $69.99 per year. Its business version costs $12 per user per month, or $144 per person annually. Of course, there are some differences between the products, but the main one is that each version targets specific market segments that have a different willingness to pay.
The second powerful way to use versions is to build good, better and best versions. Too often, companies build base products with complex options and price books that are so confusing buyers can’t decide. And confused shoppers don’t buy. So once you identify the market segment, then create good, better and best versions for buyers in that segment.
Put yourself in the mind of your buyer and how they make this decision:
- If they know exactly what they need, they buy that.
- If budget is their primary consideration, they buy good.
- If the product is just a small portion of their spending budget, they buy best.
- Everyone else — the vast majority — buy the one in the middle: better.
Having three versions of your product helps you win more customers. First, having a good version allows you to attract customers who might not otherwise afford to buy. Next, you can nudge the purchase of most buyers into better, a more profitable product for you. Finally, customers who aren’t price sensitive buy best.
You should intentionally plan to build versions, both across market segments and within market segments, and the effort should influence the products and features on your roadmap.
Acquiring customers is challenging and expensive. So once you win a customer, you want to maximise their lifetime value. A great way to do this is through add-ons.
You can create options for your product that buyers will pay you for. Those options tend to have higher prices and hopefully higher margins because your customers are locked in. Think about why popcorn is so expensive at the cinema: once customers are inside the theatre, they don’t have many other choices.
Of course, it’s important not to make this too complex. A good rule of thumb is to only create options or add-ons for items that have significant value (i.e. high willingness to pay) to a small portion of your market.
Think about what more you can sell to your current customers now that they trust you. These solutions, like all good product ideas, should go on your roadmap.
The most profitable products and product portfolios are created only after you understand pricing. Knowing how your buyers use price to make decisions is critical. Understanding how different buyers use price is also important. Once you internalise this, you’ll find it informs your entire product roadmap. After all, pricing is much more than simply placing a number on a product.