An important element to consider when you launch new products within your portfolio as a PM is the pricing. The best pricing strategy a PM can follow is the value-based. But what does it mean value-based pricing? Value according to us or to customers? As we understand these are two different things. According to the customers, the value is comprised of 4 areas as we can see below on the diagram, delta from the current situation, competitive products, pain points, and benefits including the brand. The last 2 are the most important.
Customers pay for perceived value
There is no all in one solution for the right pricing. If it is too low you leave money on the table, and if it is too high you will impact your sales and the wrong price is having an impact to the other 3p’s of marketing also. A lot of pricing is being done in gut feeling which is wrong. To avoid all these situations, and follow a good pricing strategy which aligns with your core value proposition you should follow a certain strategy. An example is the below table:
The secret here is to define very well your pricing strategy and don’t try to be in two spots as this will confuse your customers and you will deviate from your value proposition.
Pricing and the PLC
Pricing cannot stay the same throughout the product lifecycle and it makes sense as the costs to produce the product and marketing costs are changing in every phase as we can see on the diagram below:
But let’s see how pricing is defined in different phases of the PLC.
Skimming or penetration is used when the demand is huge and then we rise the price. An example is the first mobile phone or the first cars which they were very expensive. This can happen in the introduction phase as the price changes as demand is lower but the product is innovatory. As the market is growing, competitors can lure in and take a share of the market though at this phase.
The penetration tactic is used mostly with hardware companies where if you produce more, the cheaper it gets. The idea is to sell lower than the competition, to dominate the market. It is used when demand is highly sensitive to price. And it can discourage competitors from entering the market. Substantial economies of scale are available to drive down costs as shown below. Promote complimentary and captive products. Products are suitable for large markets.
What is an effective pricing process
A typical pricing strategy that you can have for your new products in your portfolio are lined in the steps below. Some steps can be subjective so the more objectivity you add the better the pricing strategy can be:
- Define pricing strategy and objectives.
In this strategy, you can decide to have a pricing strategy to maximize profits, sales, or status quo. Samsung strategy is to increase market share and Apple is focused on profit maximization that’s why their products sell in high price. The customers don’t care though and they buy it because it offers something superior to them. Now here we can see pricing company strategy alignment.
- Set Basic Pricing (a.k.a list pricing / MSRP)
When we think of price we are thinking of 3 variables – cost – competition and value. As we can see the value-based is the best one. On the right, you can see a pricing waterfall chart where according to the value that you add you can define your last score. In this model, you can see what the customer is giving now as money to solve their problems. Just be careful to define your product price you have objective and subjective factors. The objectives are: lower costs, increased production, increased revenue, better use of capacity, increased ARPU( average revenue per user), reduced churn and subjective value which is Green – ecological, healthier, safety, prestige, never fired for buying IBM, salesforce etc.
You may have customers that perceive value differently, maybe a scooter is safe for a kid but what about the parent, can you convince them? You should always calculate per customer segment, make it relative to perceived value, what is the expected payback period? What is the return or benefit for your customers? Is it relative to competitors? In what ways your product deliver greater or smaller perceived value?
Price your product in the context of your entire portfolio
Product mix pricing, product line pricing, pricing in context – take into account, optional products, captive products, By-products, product bundles. So if you increase the price of your product you will affect the other products in your portfolio also. It is easier to sell products to existing customers than acquire a new one. Another approach is the product lining – do you want the basic, plus, or premium approach? And the third is pricing in context approach where you can either 1. price high and put large discounts, 2. break up product to enable upselling, e.g copier plus extra tries etc.
Another consideration is your distribution channel. If you don’t sell directly to your end customers then in every part of the distribution you lose some margin.
- Strategic pricing: Define pricing Adjustments which are standard pricing to every product. Some of them are: discounts, allowances (margin for channel or prompt payment), segmented pricing (eg, freemium, youth fares), psychological pricing, geographical and international pricing, payment and lease/ financing programs, subscription SaaS
- Tactical pricing – determine promotional pricing to change demand. This pricing strategy can include discounts, debates, bundles, loss leader, seasonal, financing, competitive response – once your product is selling you can influence by these tactics the price of your products. By giving a discount on a bundle you don’t decrease your sales but increase them.
Usually, there are games that companies play to lure you into believing that what you buy is of superior value to what you pay. An example is with subscription services where for one month you pay 50$ and for three months 100$. Most of the people will go for the 3 months edition as it is the best value for money.