The pricing window

In reality, you can never get pricing right. Pricing is a game of maximization between the suppliers and the buyers. Buyers try to maximize their surplus of benefits over their costs and suppliers aim to maximize the amount of value that they capture out of the overall value they have created.  So to that end, pricing is a window and product and service providers must find ways to justify their pricing as close to the upper limit of that window as possible. And there's indeed a method to that madness:

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Pricing models

Begin by identifying the relevant reference value. A reference value can be many things. A good place to start is what are people doing now and the alternative solutions for getting a similar result.

 

 

Once you find the right reference value, then you have to valuate your differentiation. For example, if your solution creates productivity gains, you have to calculate exactly by how many minutes per user and per user type. If your solution help to create more business or reduce risk, then you have to quantify the economic value of the net new business and the mitigated risks. If your primary differentiation is usability or ease of use then,  quantify the benefits of having a less skilled or experienced resource to the same job or the change in time that is required to accomplish a task etc. Finally, sum up the economic value of all of these benefits.

Pricing models

Negative differentiation or value subtraction is commonly done in versioning. It’s a great way to offer good enough or simpler solutions. For example IBM’s laser printer. When IBM launched laser printer they also launched laser printer-e for their more price sensitive segment. The higher end model printed 10 pages per minute whereas the less expensive version printed only 5. A consumer panel tested both products and found out that the slower version had a chip in it to slow down the premium version. So it’s very common for companies to build products for their most sophisticated users and then subtract value to appeal to lower end segments, and expand their business. But the key in doing so to quantify the differential value in each segment and value and to price accordingly.

Value pricing

One really important point here is: if you want to build a leaner solution, do not over-engineer! Make sure your economic value doesn’t exceed the reference value - which sometimes happens during the innovation process. If it does, then your price point must be adjusted to surpass the reference price point.

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