Product pricing mindsets
Pricing can be a slippery subject for products and services. Especially for service businesses, it can be difficult to set prices, as the default approach is to charge by the hour. In his book, Implementing Value Pricing, Ron Baker argues against hourly pricing and outlines a better approach: value pricing.
Value pricing is abundant; hourly pricing is scarce. Value pricing is focused on the outcome for your customer; hourly pricing is based on time. Determining the value of the outcome of your work is one of the most challenging parts when pricing by value. That is a valuable task in itself. When you can define the outcome value of a project for your customer, you have created appropriate boundaries around your project/product.
Determining value is not the only challenge of value pricing. Having a conversation about pricing can be intimidating, as many of us associate money with negativity, conflict, and dissatisfaction. However, this doesn't have to be the case. When you and the customer define the value of your product/service together, you are co-creating the price. This is a collaborative process and can only continue if both parties agree.
When exploring the price of your product, as Madhavan Ramanujam points out in this conversation, it is best to have a product-market-pricing fit mindset. According to Madhavan (who has written the book “Monetizing Innovation”), you need to start addressing pricing very early in your product creation journey. Pricing is based on value, and your early customers can provide you with a sense of how much they value your product. Testing different pricing early enables you to find the sweet spot to attract the right number of customers in your market.
Pricing provides context for your product, helping people decide if they're willing to pay for it. Madhavan also emphasizes the importance of pitching benefits, not features. Benefits are the solutions to a segment's problems, which should be identified and analyzed carefully. Benefits often come from several features, and customers are attracted to the value they provide, not the technical details of the product. Benefits are what the product does for you, while features are how it does it.
To sum up, these are some helpful attitudes to keep in mind when pricing products/services:
- Base pricing on the outcome (value pricing), not on the time or costs of production.
- Start the conversation about pricing early. Pricing gives context to your product/service, allowing your customer to give you an accurate assessment of their willingness to pay.
- Work with your customer to shape the value pricing based on the value they gain from your product/service.
- Always emphasize the benefits of your product/service, not the features. Benefits are outcome-oriented; features are fixed and self-focused.