As our product begins its real entrance into the market we have been thinking quite a bit about pricing. In the course of this I have come upon a few basic “rules” for setting product prices. These may seem obvious to most of you, but sometimes restating the obvious can provide useful insights. Besides, I don’t have a great memory, so the more repetition the better.
First, your prices must be high enough to pay yourself and your employees, grow and maintain your infrastructure and satisfy your investors. Like I said, obvious, but it bears repeating because so many companies fail to do it. Competitive markets exert a great deal of price pressure, and the temptation to cut margins is, at times, too much for those looking to out maneuver the competition. Playing too close to the edge leads to cranky, underpaid employees, poorly maintained, out of date equipment and disappointed investors. If “the lowest price” is your only selling point you risk stymied growth and a sub-par working environment which brings us to our next point . . .
Your prices must accurately reflect the perceived value of your product. Um . . . duh. Again though, this is something to be thought about carefully. If your prospect’s can’t find enough value in your product to meet the above requirements for setting prices, you either need to change the product, change the perception or pack up and go home. There is only room for one “lowest price” product in a given market and, frankly, that’s no way to live. Raise the perceived value of your product and charge accordingly.
Thirdly, pricing needs to be simple, particularly if you are providing your product to someone who plans on reselling it. Upfront costs and recurring fees need to be straightforward and consistent. Options should be few and generally inflexible. Customers are most comfortable if they are able to budget without concern for future changes or surprise fees. Simple pricing also increases trust among customers wary of schemes and underhanded trickery. Talking to prospects in Las Vegas this past week really drove this point home as VARs were discussing ways of passing our fees on to their clients. Simplified, predictable pricing definitely gave us an advantage.
There are, of course, many more detailed rules and practices regarding pricing. Unfortunately, as a neophyte, I am still learning about them, but I’ll pass on whatever I pick up. In fact, here’s an interesting article on the 19.95 phenomenon. Apparently their are psychological factors at play in that seemingly transparent tactic.
Help a Neophyte:
I am sure I missed plenty of basic rules that the rest of you are aware of, so lay them on me in the comments.