What excites you most about a new launch?
New products? High energy launch campaigns? You might be looking forward to the high of a successful launch event, or getting out there and meeting with your fellow product enthusiasts.
Whatever makes you tick, your pricing strategy probably didn’t spring to mind.
It can be really easy to shy away from the numbers side of things, especially when budget normally feels like a limitation on your creativity. But your pricing strategy is a really important part of your Go-to-Market. Pay attention to it, and it can be a tool to propel your launch forwards.
Ignore it and it could really hold you back.
So, let’s talk about:
- Who’s responsible for pricing strategy in your company?
- Weighing up pricing strategies.
- Customer perception and pricing strategy.
- Which pricing strategy is best for you?
It’s time to get up close and personal with prices.
Who’s responsible for pricing strategy in your company?
The easy assumption to make here is that pricing can be handed over to finance or your CRO (Chief Revenue Officer) and forgotten about. But we wouldn’t be here if that was the case. As we’ll be discussing, your pricing strategy can have a serious impact on how you’re perceived by customers and the success of your product launch.
Which means it can’t be solely determined by an accountant. The finance team might decide your budget and set out what your profits need to look like, but when you're designing your Go-to-Market strategy you need to take those numbers and run with them.
When it comes to a Go-to-Market launch nothing can be done in isolation, and it's up to the leaders of GTM to work with other teams to figure out how the numbers can mesh with customer research, sales strategies and product costs to achieve a competitive pricing strategy that has the right impact in the market.
In your company, this may be a Director of Go-to-Market, a PMM, or even a CMO, depending on how you organize your Go-to-Market strategy.
Weighing up pricing strategies.
There’re lots of options when it comes to pricing strategy, so let’s dig a little deeper into what some of your options are.
Freemium pricing
As we’re living in the golden era of abbreviations (2022 word of the year anybody?) it seems only right we start with freemium. Freemium pricing describes companies that have two strands of their business: a free site, and a gated site that you have to pay to access.
Examples of this include YouTube and YouTube Red (now rebranded as YouTube Premium), Amazon and Amazon Prime and of course, everyone's favorite, Go-to-Market Alliance! Our business model has free content on one site that’s available to everyone and a secondary site where we house all our premium certifications, which you can access with one-off payments or rolling memberships.
The freemium pricing model is great for customer-led companies that are focused on achieving organic growth and delivering value to end users.
There are many strengths to this model. For example, bigger companies like Amazon and YouTube will offer free trials of their premium sites to show users what their lives could be like with access to the paid-for features.
When your trial ends and you go back to the free site, its downfalls compared to the premium site are starkly obvious. It's a great way to show users how much better an experience they can have with the premium site and convince them to part with cash.
The pitfall of freemium is getting the balance right between free and premium services. Many ‘freemium’ websites don’t actually function on the free side. You can access the page, but that’s about it unless you commit to a subscription. This is a great way to put users off and steer them towards alternative products.
Cost Plus pricing
Arguably the classic pricing model. With cost plus you simply work out the cost of producing your product and how much of a profit you want to make on each sale. You add the two together and that’s your price point.
In theory, it's simple and effective. However, cost plus doesn’t really take the market into account. It's important to be thinking about factors like competitors, customer demand, market trends, and so on. That doesn’t mean cost plus is a right off. It’s key to, at the very least, know what you need to be charging to turn a profit and what you can afford to sell for. But be sure not to formulate your pricing strategy in a vacuum.
Competitive pricing
The clue’s kinda in the name with this one. Competitive pricing is all about beating out your competitors. When you’re entering a new product into the market, you take a look around at what the going rate is for a product of that kind. Then, you undercut that price just enough to make your product an attractive alternative without putting too much of a dent in your profit margin.
In theory, the lower price point will result in a higher volume of purchases. So the lower price shouldn’t be an issue.
However, with a competitive pricing strategy you run the risk of looking like you offer less value than the other options in the market. It’s important to check in on how customers perceive your product and if they see it as value for money. Customers will happily pay extra if the more expensive product seems like better value for money.
A competitive pricing strategy is therefore best suited to companies offering a product or service with unique value compared to competitors.
Dynamic pricing
Unless you’re living with your head under a rock or you’ve spent the last three months off the grid (welcome back to the world) then you probably know that Miss Taylor Alison Swift has been in a feud with Ticketmaster.
Why, you ask? Well, when tickets for Taylor Swift’s Eras tour went on sale in the US on November 15th last year, Ticketmaster experienced a massive crash and tickets were retailing for thousands of dollars. Very few fans managed to get tickets due to bots and reselling at extortionate prices, which has resulted in a lawsuit against the company.
But how did we end up in this situation? Since Ticketmaster merged with Live Nation they’ve transitioned to a ‘drive by demand’ or ‘dynamic’ pricing model. Basically, the more people try to buy tickets, the more expensive tickets get. This is how we get Taylor Swift tickets retailing at $20,000 and fans complaining that they’d have to take out a second mortgage for tickets to see Blink-182.
It’s the same model airlines have been using for years and while it can be great for your profits, use this model with caution. As we’ve seen, it can massively backfire. That being said, Ticketmaster was successfully using this model for years before they bumped heads with Taylor Swift, likely because they’re the biggest name in ticket sales. If you’ve got a secure hold on the market, this model could be for you.
High-low pricing
This pricing strategy gives you some flexibility to move with the market. When a product is popular and in high demand, you set it at a higher price. When the product falls out of popularity and you move on to new releases, they take the higher price point and you drop the price of the original product down.
This is typically done in response to the market and your customers, so you do need to keep a close eye on what’s going on to use this model effectively, but that’s no bad thing. You can also use high-low pricing to bring in some wins in the slower business months like August and December when you’re getting less traction and need a way to attract customers in.
A similar model to this is skimming, where you gradually bring prices down over a period of time. This differs from high-low because the price arc is pre-determined based on market research and happens gradually rather than all at once.
This strategy is good for companies that want the ability to be reactive and agile with pricing.
Customer perception and pricing strategy.
Pricing has a big impact on how customers feel about a product. For example, if a company uses premium pricing, customers will assume they’re getting a premium product. But if a product only costs a few dollars, they’ll likely think it's cheap and cheerful, i.e. it won’t last.
Premium pricing models are often used by companies with a lot of brand awareness, who are building a perception of themselves as the creme de la creme, to position themselves as elite. No matter how good your knockoff smartwatch is, won’t there always be a small part of you that wishes it was an Apple or Samsung watch?
There are pillars of pricing, and customers will make assumptions about your brand based on which pillar you fit into. The American skincare brand CocoKind shared their complicated journey with pricing for their products on Instagram.
Early on their journey as a company, they were advised to increase their prices because they were in a ‘no man's land’ between the under $10 range and premium pricing. A potential stockist was concerned that the unfamiliar pricing bracket would deter customers.
The company persisted in their original pricing model and has subsequently gained customer loyalty by being incredibly open about their pricing structure. They've positioned themselves as a company that values sustainability, affordability and its customers. And by sticking to that positioning they’ve landed on a pricing model that supports the overall objectives of the company.
As you can see from this example, how you price products can have a huge impact on how your customers feel about you. When it comes to pricing strategy, it’s really important to pay attention to your customers and think tactically about how you can use price to better position yourself in the market.
Playing the pricing game
A lot of companies opt for a tiered pricing strategy as an attempt to encompass consumers looking for a premium product as well as those working with a tighter budget.
But be warned, this kind of strategy has its pitfalls. The intention is that with time you can move users up the pricing tiers, which companies like Netflix have done well.
But a range of pricing options, especially if users are unclear on what the different tiers will offer them, will typically result in users opting for the cheapest tier for fear of overpaying. And if they don’t see the value in this entry-level version of your product, they’re more likely to churn because they haven’t made the same financial commitment as a premium customer.
Which pricing strategy is right for you?
When it comes to deciding which pricing strategy is for you, a big factor will be the size of your business. Often companies are weighing up between growth vs profitability, and you need to decide which of the two will better support the objectives of your organization as a whole.
If you’re working at a startup level, growth is probably one of your biggest concerns. You want users, and you want them fast. It proves to stakeholders that you’ve achieved product-market fit and you’ve won market share.
Typically companies approach this with lower prices and incentives like free trials or introductory offers. But be warned, we can’t all be Netflix and Amazon, managing a negative cash flow model indefinitely. Unless you’re the starting quarterback of big tech, you’ll want to be cautious about overextending your resources.
If you’re looking for a product to be as profitable as possible, you’ll want to focus on your most valuable customers and try not to market too broadly, as that’s an expensive process.
Prioritize loyal, profitable customers by ensuring the end product delivers on the promises you’ve made AND delivers value. This is the opposite extreme to rapid expansion, which established companies typically use to get the most out of a popular product before it loses relevancy.
In what you could consider the middle ground is organic growth. Here, we’re thinking about growing your base of users while still generating profit. Having product-market fit will be a big help with this, but this is sort of the ideal world where you have a price point that’s attractive to customers but still turns a profit. I know, easier said than done, but it's good to have dreams.
Wherever you sit on the pricing strategy spectrum, what you need to keep coming back to when you design your strategy is getting that alignment between the teams that know the numbers, the teams that know the product and the teams that know the market. It’s your best chance at getting the strategy right and leveraging it to achieve your business goals.
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