The usual pricing dilemma is have we priced our offering lower or higher? Free, Freemium or Premium?
A high price drives out customers and a low price drives out profits. It is also a market statement about how you perceive the value of your offering. A high price pegs you at a particular position in the industry and a low price would peg you in the clutter of commoditized offerings. There are theories which also suggest that it is extremely difficult to raise low prices.
So, how do we get it right. Here are some tips which could be useful.
The Mathematical Approach
This approach hinges on your costs. Cost of sourcing the raw materials, making, delivery, marketing and any overheads. Marketers put a margin on this, called Markup, to derive the price.
This could be a good first step to begin with but usually is fraught with pitfalls. The common pitfall is your cost structure. The checkpoint is how much is your prices in range with market.
The Value based Approach
This approach is usually an art. This begins with understanding the value that the customer may derive from your offer. The underlying hypothesis is customers pay for the value they get
For a start-up, who is an unknown name in the market, this is a huge challenge. However, it is important for you to understand the value that your customer will get from your product or service. It is important to recognize that different people will put a different value to your offerings. One of the ways is to divide them into segments according to how they would value your products and then paint a picture of your most ideal customer.
Know your customer (KYC)
An understanding of how well do you know your customer (KYC) – Who is she? How does she do? How her typical day looks like? And in this context where does your solution fit i.e. how much or how less of her problems are you solving. Your KYC research should provide you vital insights into customers problems and clues to refining your solution in a way that your product could engage with the customers more and solve more of their problems. That was the purpose of KYC Marathon. It also provides an opportunity to understand the competitive offerings. Competitive offerings should not be confused with competition alone. In reality, the customer may be combining two or three products or services to get derive the overall solution.
For example, for a problem of trial room at a fashion retail, they may invest in trial room real estate and also on minimum SKU’s of fashion inventory. A virtual trial room integrated with SKU database has the power to eliminate both and provide an integrated solution. Albeit, it takes away the touch and feel factor and inasmuch way reduce the value. There are other values here – such as, additional manpower required to scan and upload the fashion product into the database (cost enhancement) and maybe reduction in staff required at the floor (cost reduction) A retailer should be willing to pay a price for Virtual Trial Room that reduces his overall cost. In this case, your market research should also tell you which retailers to target, their profile and other things.
Having understood the value levers, you could now experiment with pricing range options and conduct some sort of A/B testing with your target customers. The chances are that until you launch your A/B tests may not give you the best results. There are two critical points to consider here:
-How big is the market
-How innovative is your offering
If the market is big, usually it will be competitive. Therefore, your ability to charge a premium will depend on how innovatibe is your solution.
However, if your solution in innovative, the preferred approach should be to launch the product at a higher price point and negotiate with the market. Such negotiatons could happen in the form of “special offers”, “introductory discounts”, “BOGOF” etc.
For commoditized offerings, it is wiser to be at the lower end of the spectrum and build traction. Once you have sufficient traction, you could start making value added offers. There are enough such examples – most SaaS retailers are very good at it.
Having got the pricing strategy right, you could blend tactical approaches. Again, we could learn from most SaaS retailers. The example of The Economist is often quoted. Buy online edition at say, $55 and print at say $100 and both at say, $105 – most people choose both.
The Final Word
Pricing is a tricky decision. You can get close to cracking the Too high or Too less dilemma by KYC studies and understanding the perceived value of your offering. The point to note here is price is never permanent and requires constant engagement by the entrepreneur with the customers and market. Your competitors will soon catch up with you to neutralize your innovation advantage. Therefore, you must include regular product enhancements in your start-up plans to make the venture sustainable.