The true product market fit as we know is the intersection of product-market-pricing.

However, many a times, pricing is an after thought.

Pricing Myths

Many companies make the following mistakes when pricing the product (I have come across a few of them while consulting for these companies or while interviewing their product managers)

Our partner already had it priced: A well known Hardware company, say A, partnered with a software startup, say B, to bring the software on their Hardware. The startup was already selling the software, so when A launched the product integrated in the market, guess what they did? They continued with the same pricing + some markup. This is a missed opportunity as the two companies coming together created a much stronger value proposition, by reducing friction in installation, improved dashboard etc., than what they were doing before. Not that the company A was not aware of it, it was just that they never thought that this was the most important thing. The goal was to acquire customers and then raise prices. Which brings me to second point

We can always raise prices later: It is way easier to reduce prices than to increase them. In the worst case we risk affronting loyal customers and also expose an entry point for another company to come in and sweep out that loyal customer. This is another reason why pricing should be at the forefront from the beginning.

Price at what competitors have priced at: If we have not figured it out, there is no reason for us to believe that competitors have done their homework.

Customers are highly price sensitive: We assume that customers do not want to pay higher. This, of course, is not true. Customers want to pay as long as perceived value > price. Identifying the perceived value for each customer segment and in fact for each customer is the best way to figure out the right price.

Our products don’t deserve a high margin: Since we have developed the product, we know the cost of developing it, the complexities around it. As a result we take it for granted that anybody could develop and hence price it lower, many a times to penetrate the market or win market share, and other times in the hope that we can always charge higher prices later. But just because we have it figured out does not imply everyone wants to invest energy in developing it.

Prices should be anchored by cost: Since we have developed the product, we know the cost of development — engineering, infrastructure etc. As a result most often we get anchored by the unit cost. No wonder cost based pricing is so prevalent. However, the cost of development rarely, if at all, has any role in pricing. In fact, the pricing team should be totally isolated from the costing team so that there is no anchoring and we can identify the true economic value of our product.

Growth can be achieved by lowering price: Lowering price is often considered the biggest growth lever. However, what comes after lowering price is manufactured or artificial growth, which may seem attractive in the beginning but is self defeating in the long run. Homejoy case study is an example of manufactured growth. While many things went wrong with Homejoy, lowering prices to gain traction was the central issue.

These pricing myths risk leaving money on the table but even worse risks overestimating product market fit. We don’t have to go far to understand consumer behavior. When did we, as a buyer, not take into consideration both feature set and price while trying to choose between various packages or products? And if users would like to use product and price as inputs to their purchasing decision, pricing should be given as much thought, if not more, to define what product features should be includes as part of the MVP.

The idea of product pricing can be best described by the pricing thermometer, which is shown below (More discussion here)

Perceived value of the product incentivizes customers to convert from a casual browser to a paying user as long as Perceived value > Price.

Perceived Value — Price = consumer surplus

In this article we are focusing not on perceived value but more on identify the right price that incentivizes users to buy the product. I will discuss more on how to increase the perceived value in another article.

We cannot build, what we cannot measure. Before setting out to evaluate various pricing strategies, we shall define the metric that we will use to measure the success of our pricing strategy. Whether the goal is growth or revenue or profitability or something else, pricing should reflect the goal.

Pricing should never be done in silos. It must align with the overall company goal and strategy

In the next few articles we will discuss:
1. How to craft a monetization strategy
2. How to approach pricing for a new product
3. How to measure the success of a monetization strategy

Click on the the link above to read the section that interests you and do not forget to leave comment or any feedback.

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