Price is not a price tag!
TL;DR: Price should not be based on the value you give to your product but on the value perceived by your customers and how much they are willing to pay.
Pricing is a cornerstone of every product. The wrong pricing or the absence of the right pricing strategy can damage your product to a point of no return. You may think I'm being the prophet of doom, but that's the ugly truth.
The biggest problem with pricing is its definition as most people think price as the price tag on the product. Which is completely wrong. Price depends on how, when and why your clients use and buy your product and therefore should be based not on the value you attribute to your product, but the value perceived by your customers and how much they are willing to pay for that value.
Yeah, this is tricky, it's not like playing the Price is Right.
So every company or product team must start thinking about pricing from the beginning.
Defining the right pricing is tough, that’s why most people simply use as a strategy defining a static price and drop prices if sales go down. Currently, we spend thousands of hours overlooking and measuring sales funnels, acquisition costs, conversion and churn rates, optimize the design of landing pages and implementing dozens of features to optimize customer conversion, but we do nothing on pricing or pricing strategies. This brings up the question “Why are we trying to optimize all these things, such as the color of the bottom sign in with time-consuming A/B testing, but do nothing about pricing?”
The answer is simple because it is a lot easier. Even in Whitesmith we still do these mistakes sometimes, but we are working to change it!
Unfortunately many businesses still use the “Gym Membership Model” - as stated by Leadpages CEO, Clay Collins. Basically, they make much of their money on customers who barely use the product but don’t bother to quit, which means their entire business relies on non-consumption assets. These businesses don’t care about their customers' perception they rely on customers' laziness to unsubscribe the service.
That’s why at Whitesmith we think about pricing not as a task but as a learning process that goes hand in hand with technical and customer development. As a product studio, we are developing several products (Qold & Unplugg) and pricing is always a challenge so hard and time-consuming that needs the same focus that development activities.
While building Qold, a cold-chain monitoring system for the food industry, we faced lots of price related challenges. In fact, we are still facing some and that's I wanna share with you in this post.
Qold Pricing is not frozen in time (a wild pun appears)
Qold's current market segment is very well identified. Our typical clients are the best and most passionate restaurant owners. Only these will use our product and perceive its added value. Qold basically remotely monitors temperatures of fridges and freezers in restaurants ensuring that none fails without someone knowing, avoiding assets stored to go to waste. To our target customers, our product is not only an important mechanism to guarantee the right temperatures in their freezing chambers but also a mechanism to save money, keep the fruit fresh and save their assets if the freezers stop working. The first step of our pricing was understanding this - who are our target clients and how do they use our solution, only this way we were able to understand how they perceive the value of Qold. We don’t want to waste time with all restaurants, we focus on the best restaurants because this is the segment where our potential client perceive a high value for our product. Therefore besides creating an amazing product we are also understanding how our clients value it, and therefore how much we can charge for it.
This process isn't just asking our clients how much do they want to pay. That would be simple.
Understand pricing and what market can stand in a pricing point of view is only validated through actually trying to sell! Not in the office behind your desk imagining what someone would pay to you.
Sometimes this is even trickier because the value of a product is not transparent to the whole organization but only for a small set of users. So we clearly need to identify who will buy the solution, who will use it and who is the best person positioned to understand the value it brings to the business. In Qold's case, this was quite straight forward, users are usually the buyers.
How did we come up with our first pricing ?
Most people, including us, initially thought about pricing and pricing strategy as an economic and mathematic problem. Well, the truth is much more complicated because you need to form a hypothesis, test it and use analytics to refine it, taking into account customers feedback, all kinds of costs and taxes, competition and of course your own market knowledge and experience.
Most common approaches such as competitor based pricing or cost based pricing have a huge handicap. Most companies prefer and defend these models because they are easy to implement, but they simply don’t relate to customers’ experience, so based on this you could be overpricing or underpricing your product.
With Qold we started with low prices, and increase them every time we talked with a client until we reach the perfect gap between value perceived by customers and our price. Looking backward I understand that we started as every startup usually starts, by being cheap and raise prices later. This way we can work with customers to capture and really understand product value perception and not giving it away.
In Qold we have weekly sales stand-up meetings. Obviously we don’t discuss pricing every week, we have a quite stable model right now, but in the beginning discussions about pricing were quite common. We still talk with clients every week, so in sales stand-ups we do the wrap-ups, gather information and analyze it. For example, we try to understand how clients react to our prices, our payment models, our solution benefits and the problem we are solving and our support service. We are always looking for clients that are willing to pay and give us feedback, even in very early stages.
Gather this feedback is tricky but possible if you are really solving a pain. Usually we tend to focus on gather feedback from product features, but instead, we need to focus how we are solving the problem, and how valuable this is for the customer. For instance, in Qold we don’t focus on communication capabilities, weekly reports, real-time monitoring or even the mobile application features, we focus on ensuring that customer can be relaxed while Qold monitors and keeps safe his assets and products.
The interesting thing here, the people who do sales also do development.
This relationship between product dev, client dev and pricing is a top priority for us. This doesn’t mean we need to update our pricing every week but we need to understand what is the value perceived by our customers.
Defining product tiers
Talking with potential customers we noticed that we needed to define different price points for our services based on customers' needs, which means define different pricing tiers. A price fits all was not the solution.
With this approach defining product tiers could be difficult. Which features should the starting tier have? Which features should the professional tier have? How do we choose this?
In Qold we use a very lean approach, that helped us define the tiers and pricing strategy for each one, the value metric. This is essentially what/how we are charging our customers based on their needs and value perceived, allowing us to optimize our strategy for growth, in Qold the value metric is what we charge per month based on the number of sensors each client has. So the product tiers were based on this approach.
We could have a different approach based on features (in fact we started with that), but our top tier clients need the same features that our bottom tier customers. We could try to sell some other secondary features, but this would not improve the value perceived by the client and would only create noise to the buying process so we basically came up with a value metric that is:
Aligned with customer need and dimension;
Easy to understand;
Grow with the customer.
We wanted that all our customers had the same experience with Qold, and grow the solution based on their needs of monitoring equipment.
However as we moved to other market segments, such as Hotels and Pharmacies we are noticing that these different customers have different features needs, have different value metrics, have different value perceived and therefore different price and business models.
How do we come up with all of these?
The answer is data.
For Qold we created a set of questions we wanted to answer at the end of each customer meeting, to help us understand all of this, and gather relevant information to help us on pricing. This information allows us to analyze customers' point of view and journey: Why should they buy, why now? What impact does Qold have in their business? What motivates them? How they prefer to pay? How regularly? Who will use the solution? How much time did we take until we close the deal?
In Qold we have a set of 16 questions we must be able to answer at the end of each conversation with each client.
Why is this important? No two customers perceive the value of your product the same way. Some might think that it’s a pretty good deal given the price, while others might be willing to pay 2 times what you’re asking. Understanding these different subsegments can help us identify "pinch points" to increase value perceived by customers so they are willing to pay to access your solution.
This is crucial to give us precious information how to drive pricing and avoid future problems.
This information must be complemented with other metrics (the ones in every sales rule book) that are relevant such as Monthly Recurring Revenue, Average Lifetime Value, Customer Acquisition Cost, Monthly Growth, etc. (if you want to know everything just send me an email)
We need to continually collect data and analyze price sensitivity and value in order to make sure that what we’re offering is still relevant to what customers are looking for in our product. Test it and review it, but most of all listen to your customers. This is the process.
Looking back, the changes in Qold are mesmerizing, which is, in fact, a good sign, is a sign that we were wrong and we’ve learned! Probably in the future, this will change again.
In very early stages of your product is very important to build relationships with your early clients, people that not only pay for the solution but also give you active feedback from which you can learn a lot. Future you and future clients will thank you!
Is it cool to change prices all the time?
Many people are always afraid of changing pricing strategy and mostly prices all the time. With Qold we’ve been there, I had this same question. Mostly because clients talk with each other, so if we continuously change prices they will eventually notice that they have the same solution that the restaurant next door, but they are paying in some cases 100% more.
This is a challenge most early stages will need to face, and it is difficult to manage. Our approach is based on transparency. In Qold early adopters are rewarded, most of them subscribed our service in early stages when the prices were lower. Increasing prices is about increasing the value of your product or the way the product is perceived by users, and this is only achieved by deeply understanding your customers, exposing yourself to them through a meticulous process and that’s what we’ve been doing.
My last advice on pricing, embrace learning.
Establishing a pricing strategy and a price for your product is a process, like your product it evolves over time. We need to plan every action to learn something from that.
Learning will have a huge impact on your business and your decisions in the long term, because even if things go wrong and your sales start slowing, your acquisition slows down and retention decreases, you will not react as most companies do - the fast response and easy way to deal with this: “cut the prices” - instead you will understand that probably the gap in the value perceived and price isn’t large enough.
Ultimately if you want to master pricing you must master your market, meaning you must know your customer, otherwise you don’t know your value and how other perceive that value.
If you want to read more see this article, is a good starting point.