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What are Product Pricing Strategies?

Sometimes setting a price seems so hard that you just want to put a dart board filled with different prices up on the wall and see what number you hit. Ok, maybe that’s being cavalier about a topic which makes the difference between a profitable product and one that doesn’t quite hit the mark in the market. The truth is that product pricing isn’t about just pricing your product but the strategy involved. You will be much more successful if you use product pricing strategies as a starting point.

Strategy turns pricing into a deliberate process in which the company strategy dictates both the set of product features, the value customers associate with them and the brand. In this scenario, pricing is a natural outcome of the discussion, not a starting point. For example, does your company create luxury products with a high-end brand? If so, product pricing strategy almost dictates that you set your price very high to convey the fact that your brand is very exclusive and that not everyone can afford it. For low cost brands, like Walmart, the product pricing strategy indicates that you keep your price low and sell on volume.

Product Pricing Strategies – Choose Wisely

Cost Plus

Calculate what a product costs then add a markup. This internal method of focusing on pricing doesn’t really take into account what the value is to the customer, but it’s a way to ensure the profit that you desire for each unit of the product that is sold. This is not the best product pricing strategy.

Value-based Pricing

The value-based pricing strategy focuses on what the product is worth to customers. Determining value-based pricing can be complex. A general rule is that you break down each piece of the additional value that you provide over and above today’s solutions and then calculate what the total adds up to. Then you test it with various audiences to see what happens when customers are faced with a buying decision at that price. If you get stuck, bring in a pricing expert.

Example of Cost Plus vs. Value-based Pricing

Here’s a simple value-based pricing example. You take a small child to a petting zoo, and she wants to feed the goats. You put a quarter in the goat food dispenser. From a pricing perspective, there is the cost of the goat food — about two cents. Then there is the amazing value you get from watching your child grinning as she feeds the goats. You take pictures. It’s so cute. Okay, what was that worth? $5? $10? You’re going to show this picture at her wedding reception 20 years from now, right? $100? The petting zoo charges you 25 cents. It’s a deal. The petting zoo is most likely using cost-plus based pricing, when it could charge a much higher amount because the value of that particular moment is very high for parents.

Now, think of your product and the problem it solves or what it provides to the customer. Does the customer get to go home earlier at night? Does she not worry about her work so much? If you sell security software to an IT manager who is then able to manage the software more easily and work shorter hours, then the value to her may be very high. What value does your product provide? It isn’t in a list of features; it’s in the benefits (often defined in emotional terms) that your product provides to your customers. How much is each benefit worth compared to what the customer does now?

Product Pricing Based on Market Position

The fundamentals of pricing are based in how your product is perceived in the market. Are you a market leader with a differentiated product? If so, your price most likely sets the benchmark for the market. All other products will be valued against yours. If you have a less dominant position, you may find that lowering the price below that of the market leader is the only way to compete. If you have a specialized niche, you may be able to charge even more than the usual rate because the value is so much more. For example, think of products for the military. If your company builds products that can handle harsh conditions such as extreme heat and sandy environments and there aren’t that many specialized suppliers of the product, the military is going to be willing to pay you a higher price.

Your Price and the Price to the Customer

When you create a product, you’re often not the one selling it directly to customers. Customers are often getting it from resellers who buy from distributors. Each step along the chain between the producer and the consumer takes a cut of the money that eventually comes from the customer. The table shows you what this pricing stack looks like for a 25-pound bag of goat food.

Product Pricing Strategies - Pricing Stacks Through Distribution

Product Pricing Strategies – Pricing Stacks Through Distribution

As a Product Manager, you need to understand not only your price but also the price up and down the line of your distribution channel – and in some detail. What margins can each channel partner accept and still have a viable business? If you don’t know it today, go and do this research. You’ll need it soon enough.

Product Pricing Strategy – Gotchas to avoid

While there are many pitfalls in pricing, here are a few to keep in mind.

  • It’s hard to hold the course on your pricing strategy when you’re scared that you won’t make the sale.
  • Keep pricing across the product line consistent.
  • It’s virtually impossible to raise your price after the product has been released. The market will rarely accept it. The opposite, however, is true. You can always lower your price if need be.
  • Most pricing decisions are made on a gut feeling basis. By applying some strategic thinking you’ll be ahead of many companies as well as your competitors.

Good luck with developing and keeping consistent with your product pricing strategy.

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Parts of this guide comes from our best-selling book Product Management for Dummies.

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