How Should You Price Your Product?

Recently I had a chance to listen to an Ian Altman interview with Ebong Eka on his podcast.  I won't spoil the podcast and discussion of Ebong's new book, but I do want to expand on their discussion around pricing.  Both of them have spent time coaching clients to expand their thinking around pricing.   Ian Altman wants client to stop using cost plus as the basis for pricing.

Ian provides the example of the consultant who previously made $50,000 a year and now charges $40/hour.  If you divide $50,000 by 1800 (about 1800 hours in a work year) this means the consultant is getting more than their previous hourly rate.  Based on this cost plus mentality, the consultant is likely pricing their services too low. 

I believe that the most import measure of price is based on the value your customers receive from your product or service.  In other words, in order to offer a good value, you need to charge less than the value they receive from your product.

Below are a few questions you can ask to better understand the value or lack of perceived value your clients receive from your product…

  1. If you choose to do nothing, what are the results? (ask them to quantify using follow up questions)
  2. If you were to describe our service to somebody else what would you say?
  3. How would you compare our service and price to other alternatives?

Ian Altman cautions his clients not to spent too much time chasing a client that will become your client for a 5% discount off the competition.   His reasoning is that this same client will leave you for a 5% discount off your product.  I agree with Ian but debate him and say that what the competitor charges is relevant as many clients will use it as an anchor in negotiations.  Of course, it is less relevant if you are willing to walk away because your client is stuck on this as an anchor and won't consider other factors that should influence price/value.

I agree with Ian.  Many companies don’t charge enough for their product, but I also suggest that companies need to vary their pricing strategies.   For instance, some customers might not have an issue with your price, but might want flexibility in payment terms such as financing or a discount for paying up front.   Other customers might want a pay as you grow model such as what is offered by Software as a Service (SaaS) or cloud vendors such as Amazon, Google or Microsoft.  

Another innovative pricing model is the freemium model.   This can work well for customers that just are not ready to pay full price yet.   Examples of this model includes open source, free trials, free eBook downloads, YouTube videos, and How To Blogs.   Savvy marketers can move their customers down the sales funnel from a freemium model to a one to many model, and eventually to a premium offering.   Marketing automation software makes this model possible and cost effective.

At this point you might be asking yourself what to do if my product costs more than the value my customer are receiving from the product?  In this case you need to change your product, your target customer or even your packaging.  Think it can't be done?

As a source of inspiration, I wanted to leave you with one example of brilliant pricing.   Steve Jobs sold customers on the idea paying $.99 for songs.   His target customer was largely people who were downloading music for free, albeit illegally.  He made them a hero by offering them good Karma, quality encoding, preview of every song, cover art, music organization software and 3 songs for less than a Starbucks coffee. 

Are you charging a fair price?   Does your pricing support a good life for your family and employees?  Is it time to change your product, target market, packaging or thinking about price?  Share your thoughts below.