How to Set Product Price: 5 Do’s and Don’ts of Pricing to Maximizing Revenue

February 15, 2011
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Don’t fall into the pitfalls of overcomplicated and underpriced. Keep it simple, negotiable, and valuable.

A quick word on pricing.   Control.

Pricing mechanisms are perhaps one of, if not the, best revenue control mechanisms. Obviously there are multiple factors that impact pricing, such as the maturity of the product, the nature of the market place you are in and the wallet size of your targeted buyer. But even under the most marginalized commodity business, dialing price up or down can offer an incredible amount of control over the volume and related revenue earned from products or services. It is a mistake to miss the opportunity to gain this level of control and there are common pitfalls. Here are some do’s and don’ts to consider when setting your product price.

DON’T

Commoditize: One of the worst things that can be done when pricing is to commoditize the service or product. It is far easier to lower price than to raise it, err on the side of higher margins. You can always course correct.

Over complicate: The pricing structure cannot be complicated. Buyers want to easily connect the dollars they are parting with to the value they find in the service or product. If the pricing structure is complicated they will not be able to do that and in most cases assume your offering to be over priced.

Forget Value: If no clear statements are made about the value the product brings it is difficult to justify the cost and to explain why the price is set as such. The price list and how it is laid out must be in alignment with a statement of value.

Inhibit Your Sales People: The sales team needs to understand what they are able to do with pricing, they need to have the flexibility to manage pricing alternatives that will help motivate their buyers. For example, if the buyer’s budget authority lies 5% beneath list, your sales team must have the authority to drive the price down to that number.

Leave Money on the Table: Finding out the buyer would have paid more for the offering after contracts are signed is too late. Again, lowering price is far easier than raising it.

DO

Differentiate: The price must in some way differentiate your product or service. If your price is higher than anticipated then it must be presented as a premium. If it is lower than the competition’s offering then effort must be made to defined them as overkill. A “why would you pay for all that when you’ll only use a fraction of it?” sort of statement.

Make it simple: the product or service must be easily packaged. Think back to desktop software when you could look at the back of the box and you’d see three columns of options, standard, premium and deluxe. Each column had a list of features and they were checked off against which features were included in which package. That is analogous to what making it simple means. Package up the offering in consumable bites with a price for each. Resist the urge to make pricing highly configurable as it adds unnecessary complexity.

Affix Value: In marketing 101 we all learn about selling the sizzle and not the steak. That axiom hasn’t changed. The sizzle in today’s terms is the value that the offering delivers to the buyer. Therefore they are not paying for deliverables or features, but for right to attain that value.

Define Negotiation Parameters: The sales rep, 9 times out of 10, will drop to the lowest possible price in order to close business. It is in their nature. What they miss on that deal they’ll make up for in volume. Good for them maybe, not so good for your company. Therefore set negotiating parameters. Set a lower threshold that they are allowed to go to, and policies that require their manager’s approval if they dip beneath the threshold. This protects your revenue equations and gives the sales rep the flexibility they need.

Reasonably Maximize: Along the same lines of not leaving money on the table, the price must exhaust the possible amount that the buyer is willing to pay for the established value. If, for instance, the software as a service offering is easily earning a $300 monthly subscription fee then it is likely that your buyer views this as a $3600 annual expense and finds it to be a bargin. Why not find out if he’ll be equally pleased with a $5000 or even $10,000 annual expense?

What steps are you taking to ensure you are leveraging your pricing options to exercise greater control over revenue?

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2 Responses to How to Set Product Price: 5 Do’s and Don’ts of Pricing to Maximizing Revenue

  1. Dummy
    February 16, 2011 at 2:22 am

    Commoditization may work in some instance and these days it seems that answer is in longtail revenue model. Very true in Software arena…

    • February 16, 2011 at 12:00 pm

      Not sure that I’m following you on where commoditization would work as part of some long tail strategy. The suggest here is that avoiding a low price play when setting out to create the price structure is the wise move.

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