How to find the right price for your products or services? (Blog 3/3)
This question has haunted product managers and entrepreneurs since eternity. How do I find the right price for my product that maximizes my business value while not compromising the customer value?
Pricing is a deep subject therefore this is a 3-part blog series that covers all important concepts for pricing.
I recommend skimming through blogs 1 and 2 before reading 3.
- Blog 1- 10+1 Pricing strategies for products
- Blog 2- 7 Pricing Mistakes Entrepreneurs Make
- Blog 3- How to find the best price for your products or services?
I cover all these 3 blogs in this workshop on pricing with PM enthusiasts. If you are only interested in learning about the reservation price, then you can tune into the 57th minute of the talk.
One concept from the previous blogs that you should know before reading this blog.
Reservation price of the buyer is the maximum price at which the buyer is willing to buy the product.
The intent is to maximize customer and business value, therefore it becomes important to understand what is the reservation price of the buyer. That will allow you to place your price at the right value. Your price needs to be above your cost price but lower than the reservation price of the buyer.
There are various ways to achieve this:
You must have heard of products and services that allow you to auction products or services.
For example, look at this thread 🔓Valuables (cent.co) to see Jack Dorsey selling his first tweet. What is your reservation price for the tweet?
Apparently sina estavi’s reservation price for the tweet was $2.9mn.
Auctions often set a minimum bid and let the customers define their own maximum price. Auctions work great for products and services that have an aspect of rarity associated with them.
Auctions are where the proverbial “beauty lies in the eyes of the beholder” comes true.
What Sina may consider worth $2.9mn others may consider it as less than $7000 for someone else and typically marketplaces are unable to set a price for such products.
If your products have exquisite value, then you may wish to consider bidding or auctioning as a pricing strategy. In an auction, you set the minimum price and let the customers set their own reservation price.
Provide premium options in tiers
Providing premium options on top of your base service is another way to validate the customer’s reservation price.
Imagine you are building a SaaS service and wish to use the Freemium model for pricing. i.e., you want to give some basic capabilities to your customers for free to get them hooked on to your service.
Now, on top of that free base price, you can consider providing premium pricing options in tiers. As explained in the 1st blog, tiered pricing is a great way to unlock potential value for customers in a progressive disclosure manner.
Imagine, you are using a simple TO DO application for your organization and since you are a team of 2, you just get the basic features for free that allow you to write your TODO list.
But as your team grows and now you are 10 members in your team, you require to collaborate on each other’s TODO list. And you are willing to pay a dollar for that collaboration feature.
Now, when you grow to a team of hundreds, you want the TODO list to get transformed into project plans and you are willing to pay another dollar for it.
This is called progressive disclosure of features and pricing as you grow. This tiered pricing approach works great for customers to pay as they unlock additional value.
It is also a great way for you to check on the reservation price for your customers for each value that they unlock.
A/B Testing with pricing
Experimentation is not only limited to products. You can do A/B testing or experimentation for pricing as well.
It is difficult to get your pricing right at first.
In an A/B price test, you display “Price A” to few customers and Price B to another set of customers. Here you need to ensure that the 2 segments of customers are as identical as possible or you may introduce bias into your experiment.
Then you measure how your purchase metrics work for both the segments to validate the efficacy of the prices.
A/B price testing could be an effective way to check your customer’s reservation price.
Check competitive pricing versus value
At times, finding a reservation price could be a lot simpler and all it requires is some elementary research work.
If you are pricing your product at $100 while your competitor is offering a similar product with comparable value for $300, then you need to rethink your pricing immediately. Add to that if your competitor is doing decent business, then it is already screaming wrong pricing strategy at you.
It is recommended that you create a compete value / price matrix that looks something as follows:
COMPETITOR — Name of the competition
PRODUCT POSITIONING— How does your competitor wish to differentiate the product? What is the core value that the competitor is offering? It could be quality, economy, etc.
| VALUE | PRICE |
— — — — — — — — —
| What is the value that the competition shipped| What is the price for that value|
Once this table is created, you create your own chart to evaluate the value shipped and price and compare it to that of the competitor. This will help you to understand whether your product is overvalued or undervalued.
Next, you just dont simply inherit the competition’s pricing. This is just a guideline to help you ask the right questions. Once you find the discrepancy, you begin your exploration exercise to get your price right.
I hope you found value in this blog. You can leave a comment to make it better. If you learnt something, then leave a few claps. It is like a bell outside your pizza shop that tells that the pizza was tasty :)