The product pricing rabbit hole

March 9, 2022
Justin Bohlmann
If you’ve ever asked yourself ‘how much should I charge for this?’ and haven’t had a solid answer then this is for you.

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But first, a story...

Way back in the day (circa 2005) I used to sell on eBay. Back then eBay was a very different beast to what it is today.

It was pretty new to Australia and the first eCommerce experience for many people, both sellers and buyers.

The auction format was all the rage. People loved it and would bid crazy prices on the strangest things.

We were selling home gyms and depending on the day and time an auction ended, the price for exactly the same piece of equipment could be as low as $600 or as high as $1,500.

It was crazy!

Of course we adapted to this and made sure the auctions ended at the optimal days of the week and times of the day but the real lesson was in understanding the customers 'willingness to pay’, a concept I’ll go into more detail on shortly.

We knew we could comfortably sell the gyms for $850 and make a good profit but accidentally discovering that people were willing to pay $1,500 for a gym was a game changer.

This article is about changing accidentally to intentionally.

These are the pricing principles and concepts I wish I understood back then.

SaaS, eCommerce, consulting, food... It doesn't really matter what you're selling, these principles can be adapted.

Pricing Principles

Understand these things about your customers:

Their willingness to pay  

(i.e. how much is your ideal customer prepared to pay for your product)

The best way to get the answer, use the Van Westendrop questions. Here are the questions I ask and how I ask them (the original questions differ slightly, I think mine are a little more conversational):

For a product that does XYZ or solves ABC:

  • At what price is it so expensive that you wouldn't consider buying it?
  • At what price is it so inexpensive or cheap that you'd question the quality and not consider it?
  • At what price would you begin to think it's getting expensive, not out of reach, but you still might consider buying it?
  • At what price is it a bargain - great value for money?

Feature importance

After doing it the hard way in the past I discovered, courtesy of profitwell.com, a much simpler way to really understand what features are important to our ideal customers.

How?

Simply ask these 2 questions:

  1. Out of the following features, which is the most important to you?
  2. Out of the following features, which is the least important to you?

This is very different from asking people to rank features from most important to least important. It makes it very clear what to focus on.

Objections

What objections do your ideal customers have to your competitors?

Find this out by asking them what they use, why they use it and what they don't like about it.

This helps you to overcome these objections in your pricing strategy and your marketing copy.

Preempting objections and being able to overcome them is key to selling more!

Note: the best way to get this information is through real face-to-face or video interviews where you can see people's reactions and dig deeper when needed, then to back up your findings at scale you can use surveys.

Charge more than you think you can

Just because you’re a new business or you're releasing a new product doesn’t mean you don’t have a better offer than the competition.​

It’s easier to reduce prices than it is to increase them​​ later.

The more revenue you make, the more value you can add to current and future customers because you have more to invest back into your products and services.

You can thank @patio11 for this advice.

Price and price messaging should align to your ‘atomic unit of value’

Atomic unit of value has become one of my favourite terms, you can thank @josh_coyne for this one who first introduced me to it!

From what I can find it originates from 'Hartree atomic units' which is "a system of natural units of measurement especially convenient for atomic physics."

So, what does it mean?

Simply, if you can boil the value you provide down to one thing, what is it?

For us at Thriday it's time, we save small businesses time, everything we do, in some way shape or form, relates to saving small businesses time. That's very different to saying we provide the best invoicing software or the best accounting platform, 'best' is subjective.

Be specific. What's the outcome, what's the value? Talk about that!

For a solar company selling a battery the atomic unit of value might be energy.

I've seen solar pricing in terms of 'Installed cost per kWh capacity' this is really interesting because a big system doesn't really cost that much more to install than a smaller system so when you see a 16-20kWh unit might cost $970 Installed cost per kWh capacity compared to a smaller 1-5 kWh unit at $1,590 Installed cost per kWh it looks like great value.

For Thriday, even though our atomic unit of value is 'time', it wouldn't make sense for us to charge by the hour, however, the more revenue you generate the more time Thriday saves.  

In this case revenue can become a proxy for time.  

If our subscription cost increases based on the amount of revenue a company makes i.e. the time we save them then we’re truly aligned to the value we provide.

This has the added benefit of making it super easy for someone to understand which subscription they should opt for which we’ll talk about in a minute.

It also brings me to the next point:

You should grow as our customers grow

This is known as value-based pricing.

As a customer,  the more value you receive, the more you should be prepared to pay for that value up to your ‘willingness to pay’ threshold.  

To deliver the best product or service you can, you should be growing as your best customers grow which means charging more for your product as your customers are getting more value.  

Use multiple pricing axis as a lever for growth​​

Some features are more valuable to some people than others.

When it comes to SaaS products security might be super important to some people and not others so SSO and audit logs might be an axis of value where someone who wants those features are prepared to pay a premium for them.

This is where understanding ‘feature importance’ becomes important, when you know which features are important to which customers you can charge accordingly.

Another shout out to @josh_coyne for this!

Pricing should be easy to understand

(It can become more complex with more brand equity)

Your customers should be able to position themselves in one of your pricing options without thinking about it.

For us, if we were to try and charge based on the hours it took to manage your financial admin each month you'd need to keep a journal for a month to be accurate or at a minimum look at your calendar and do a few sums.

But, if we show which subscription is best for the amount of revenue you’re generating you know immediately where you fit.

Don't innovate on price.

Pricing shouldn't stray too far from the norm in the way it's presented to your audience.

People who buy SaaS tools have all done it before and have an expectation of how they're going to make an informed decision on how to buy your product, make that decision as easy as you can.

Shout out to @jasonlk and https://www.saastr.com/ for that one!

Experiment often

Just like me back in the day selling gyms on eBay, you should experiment with your pricing often.

If you have scale, quarterly pricing experiments should not be out of the question.

In the early days your strategy should dictate how much you charge, to who and for how long

Price according to objectives

1. Revenue growth - Maximize revenue growth in the short term selling for as much as your customer is willing to pay

2. Market share - Price low to win market share

3. Profit Maximization - Sell the latest product at a high price and repackage older products at a lower price to address different customer segments just like Apple do with the iPhone for example

Find more detail on this one here: https://tomtunguz.com/the-3-pricing-strategies/

The rabbit hole (best) of content I dived into throughout this process:

Well worth following:

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