Pricing – it isn’t glamorous but it certainly has a long-term impact on sales effectiveness and profitability. It’s actually one of the most important things a marketer does. Here’s a primer on what to think about when tackling those tough pricing decisions:
- Start off with a clear pricing strategy: what is the basis for the price level and model? Make sure it’s supported by a strong business case for using the product so it’s easily justifiable to a customer. And benchmark against equivalent pricing for both competitors and substitutes.
- Should you consider a “loss leader” or “freemium” pricing model to encourage experimentation and early adoption? What’s the upgrade price?
- Is the product meant to be sold through channel partners? What price do you want your channel partners to sell for (e.g. an “MSRP”) and what mark-up do you expect them to take? You must ensure that selling your product is profitable for your distribution channels while keeping it attractively priced for end users. It’s even more complex when there are two mouths to feed with two-tier distribution (i.e. a distributor selling to dealers). When making your pricing decisions, don’t forget about the services the channel partner will add to your offering and how this will impact the total price to the customer.
- Does your price include delivery, initial set up, technical support, training, feature updates, warranty, etc.? If the product is software, do you intend to charge for major feature upgrades on a per-user or per system basis in the future? If so, you’ll need to make that clear up front in your published pricing.
- When many people in an organization will use a software product, consider pricing models based on: time (per month, per year), user or device licenses, site licenses, system license, etc. Using different variables, or a combination of variables, provides flexibility in setting a price curve to address different applications (large vs. small, single site vs. multi-site, short term vs. long term use, etc.). But don’t be too clever! Your customers and sales reps shouldn’t need a PhD to figure it out.
- Set pricing for any professional services, warranty, technical support or consulting, that will be sold with the product. Look for opportunities to generate recurring revenue steams rather than just one time sales.
- What’s the opportunity to create a multi-product bundle, including discounts, to increase the size of the sale?
- Will you offer volume discounts to channel partners or direct customers?
A well-planned product development program will consider pricing strategy up front. This ensures that product modularity, optional features and tracking mechanisms can all be incorporated into the design specification. That way, at launch, you’re not struggling to ensure the price is right!