How to price? Start by getting to know your space
Most managers find pricing “probably the toughest thing there is to do.” While companies struggle with the complexities of pricing, they often rely on anecdotal observations to set prices. Sometimes, they even make pricing decisions by over-generalizing the assessments of few of in their sales or product teams. Many businesses, therefore, end up with incorrectly positioned offerings that cause them to leave money on the table.
When it comes to pricing, there are five key areas on which your product, marketing, and sales teams must align. These five areas are:
Industry drivers
Market drivers
Segment drivers
Product drivers
Buyer/user behaviors
In this post we'll focus on the industry-wide determinants of pricing.
What are the cost structures and supply-demand dynamics of your industry?
When it comes to industry drivers, the most important areas to understand are the cost and supply-demand structures of the industry. While the generally accepted buying units will determine most of your cost structure, there may be opportunities to achieve higher margins by offering new pricing models, packaging options, delivery frameworks, or sales channels.
For example, we recently had an enterprise software client who had to write off 85% of the implementation costs as cost of sales only because they "believed" they could not justify it. When we went through a validation exercise however, we were able to uncover that their customers actually valued the high levels of customization that our client delivered for their specific workflows. We then innovated their entire delivery pricing structure and created a brand-new metric for pricing implementation: deployment credits. You can read more about that story here.
The less transparent costs of your structure are just as important to your profits as the invoiced costs. The fixed and variable costs are easier to determine than the costs of your off-invoice items, such as cost to acquire, cost to deliver, cost to serve, cost to retain, and cost to retool. To accomplish a true breakdown of your profitability, you can begin by constructing the price vs margin distribution of your current customers and obtain a clear representation of your most profitable segments. Then, you can use that information to formulate the pricing window for your next offering.
What stage is your industry in its lifecycle?
The industry lifecycle is one of the key determinants of your demand. Is the demand for your solution at its infancy, growth, maturity, or end-of-life? In general, suppliers charge a premium prices for solutions that are at early stages as they aim to build them for their most sophisticated users and the early adopters. In time, they translate the successes of the early adopters for mass adoption, while developing additional solutions for the other segments. On the other hand, end-of-life pricing may enable you to acquire a larger base for your next generation offering or help you achieve your customer retention goals.
What’s the technology outlook in your industry?
The technology outlook of your space is one of the most important influencers of your long-term revenue. Your technological advantages and disadvantages will impact and communicate the value of your roadmap - as well as how handle switching costs of your customers. It’s essential to continuously monitor where the technology is headed and calculate the risks associated with your technology.
Finally, the available and innovative channels, regulatory requirements, and the length of your product development and customer acquisition cycles are also important considerations to get to know your industry - especially if you can create an innovation around any of these.
Ready to begin your own pricing innovation?
