Why Is Pricing So Difficult?
Most managers find pricing “probably the toughest thing there is to do” when it comes to launching new products and services. Whether they are seasoned product owners or experienced marketers, managers struggle with the complexities of pricing. Today we explore a few of the reasons as to why that could be.
Pricing Is More Science Less Art
There is a variety of pricing techniques in business: cost-plus pricing , dynamic pricing, value-based pricing, psychological pricing and many more. However, there is not an established or repeatable scientific approach that works for different kinds of products, services, or markets across the board.
Where the art meets science in pricing is that it tests how well you know your customers, competitors, and products all at once. A laser-sharp focus is key to understanding your customer segments and how you will structure your offers to meet the different needs of each of your segments. Even when you nail down your segments and build your product fences, your offer must match or exceed your competitor’s value. And there lies the key to all of it: mastering the value of your product differentiation in relation to the reference set.
Pricing Is All About the Value over the Reference Set(s)
The power of pricing comes from the differentiated product attributes that are of value over the current customer experience - a concept of what pricing scholars call the “exchange value”. This is easier said than done because it requires rigorous competitive research and quantitative analysis. Take most B2B software and software-as-a-service - SaaS. In SaaS, products are less transparent and a feature by feature comparison is difficult to make. In most cases, managers depend on an "artful translation” to draw the ‘feature-value ‘spectrum from the ‘customer-product interactions’ which in most cases doesn't prevent leaving money on the table.
The Never—Ending Dilemma in Pricing: Drive Profits or Sales?
The primary goal of pricing is to find the sweet spot between the margin vs. level of market adoption that will maximize the profitability, over a period of time. In this case, pricing becomes an integral part of your growth strategy, rather than just a lever to drive sales. It also follows that while a firm chooses to price premium levels for the highest profit margins, such as in luxury goods, another might prefer to price for the fastest market penetration. Even though neither of these cases may be value-based approaches, they may be equally strategic and right for different types of products, businesses, and markets.
Here' at Pricing Innovations, we’ve set out to reimagine the way we price and monetize products - in a repeatable, scientific, and innovative way. That’s why we created The Pricing Canvas ™. The Pricing Canvas ™ consists of ten sections each representing a structural component of your business, product, and market. You can focus on any of these sections individually or as a whole, and price your offering. The Pricing Canvas ™ is equipped with more than 30 guiding statements that were designed to help you uncover the right pricing strategy, process, and structure for your space.
Download The Pricing Canvas ™ Guide and see if it makes pricing any easier for your product or service.