Technology pricing can be tricky, particularly for software and services. When there’s no traditional cost of goods sold (COGS) to recoup, the pricing strategy for a SaaS product can go in a lot of different directions.
Do you give the product away and try to monetize traffic and users through other channels? Should you offer bargain basement prices to capture as many users as possible? Or do you position your product as a premium good, with a high enough price tag to return a tidy profit on every sale?
Even after you’ve chosen a lane, there are still myriad details to consider. Packaging, bundling, and discounting have plenty of nuances. Let’s dive into this complex conundrum while taking a product management lens to the pricing strategy problem.
Demystifying Product Management’s Role in Pricing Strategy
Before going any further, let’s tackle some misconceptions about pricing that many product managers (or aspiring PMs) may hold.
Myth #1: Product management owns the pricing strategy
Sometimes product managers do own the pricing of their products, but this isn’t often the case. They should, at a minimum, be one of the key players involved in defining how much to charge. But this aspect of the product is sometimes elevated to higher levels of management.
Product managers must get clarity on what leeway they have when it comes to setting and adjusting prices. The leadership team will have expectations and assumptions that may not line up with what the “CEO of the product” would prefer.
Myth #2: Pricing is a solo effort
Just like product strategy and roadmapping, pricing should be a collaborative effort. Even when product management technically “owns” pricing, product managers are not doing it in a vacuum. It requires participation from other stakeholders. In particular, marketing, sales, and finance.
These other departments will provide many insights:
- What the market will bear
- How competitors position their solutions
- Budgetary constraints of target customers
- What kind of margins and revenues the company expects for the product
This input is invaluable. Alignment around pricing is just as important as any other aspect of the product.
Myth #3: Pricing isn’t part of the product strategy
The job of a product manager is to bring a great product to market that meets customer needs, has a high-value proposition, and continues to delight and satisfy users. So, what the company charges for it has nothing to do with how great the product is, right?
That would be incorrect. How a product is marketed, priced, positioned, and packaged is intrinsically linked to the overall experience.
Think about going out to eat. What you pay sets your expectations for the experience. Throwdown $5 for a value meal, and you’ve set the bar low. Pay $50 per entree, and you’re expecting one of the tastiest meals of your life.
The sticker price on your product is no different. It will impact your total addressable market (since fewer people will pay the money for a more expensive offering). It also creates preconceptions about the value the product will provide and its overall quality.
Letting Long-Term Goals Drive Pricing Strategy
Just like goals drive roadmaps, they should also be driving pricing. Whether you’re angling pricing for growth or profitability should be informed by organizational objectives and where you are on your path to achieving them.
You can figure out which pricing strategy aligns best with those goals by considering the pros and cons of each approach.
We’ve all seen the hockey stick growth chart in slide decks. The potential for rapid exponential growth is what gets entrepreneurs out of bed in the morning. It’s also what makes venture capitalists reach for checkbooks.
When a tech company is still in startup mode, growth is pretty much all that matters. There are good reasons for this. Showing a rapid increase in usage proves that there’s a sizable addressable market and that you’ve established product-market fit. It also confirms that your marketing is effective, word-of-mouth uptake is happening, and you’re beating out competitors for new customers.
Compounding growth rates and rapid acquisition of users is validating. It helps companies raise more money and grab market share. You can base this valuation on the size of your user base, a “growth at all costs” mentality may serve the company well at this juncture.
You can accomplish this pace with aggressive low pricing, free trials, introductory offers, and complimentary add-ons. Managing a money-losing product comes with its own set of challenges.
However, at some point, the party must end. All products have a ceiling on skyrocketing growth and will see things level off. These firms will need a plan for how to keep those customers around and increase profitability to remain viable in the long run.
Startup founders are the new rockstars. Everyone is searching for the “next big thing.” Maintaining and increasing profitability isn’t particularly sexy. However, making money is the primary aim of a “normal” business.
Product managers tasked with squeezing as much cash as possible from the products in their charge have a different set of challenges from those concentrating on growth. While the goal isn’t to necessarily augment or contract the user base, they still must keep customers happy and ensure the product is delivering on its value proposition.
But when it comes to pricing, the objective is to push the limits to generate as much profit as possible. This attitude means raising or maintaining high prices while cutting costs. This balance occasionally means cutting off customers that are more trouble than their worth in your quest to increase average revenue per account (ARPA). But it’s primarily about pushing pricing to its ceiling.
Products that have reached market saturation or even those beginning to sunset may fall into this category. The intent of these cash cows is to milk them to the last drop. But beware being too aggressive and shedding loyal, profitable customers by pushing the pricing envelope too far.
This strategy is the “Goldilocks” of pricing. You want to keep adding more users (and there’s still plenty of users to capture). But you’re also interested in the product’s long-term viability. Each sale should be generating meaningful profit, not just covering costs or taking a loss.
So it comes down to balance. You want an attractive enough price that you’re still able to woo new users. But you also need healthy enough margins that each sale adds incremental financial value and profits to the company.
At this stage, much of your pricing may be driven by the overall market dynamics. You need to keep pace with competitors, so you’ll be looking to establish comparable prices.
Don’t price the product too aggressively low to compete on price. But if you can remain a little bit cheaper while still staying profitable, all the better. No one complains about paying a little less than the alternatives, plus it removes a possible point of objection.
Pricing is All Psychological
While 100% of rational buyers do exist, most customers aren’t merely tallying up the cost of every ingredient to establish their perceived value of the product. Instead, their reaction to a price links intrinsically to the value they place on the product.
Although corporate goals may be guiding your strategy, determining the actual price point might benefit from a little Psych 101 as well.
Cheaper isn’t Always Better
The idea that the lower the price, the more people that will buy it is a common misconception. Pricing is always relative to the value, utility, and quality of the product or service.
You would be pretty suspicious of a brand new car selling for $5,000 or an airline charging $19 each way. Customers appreciate quality and will pay for it. If it’s too cheap, they’ll be skeptical of quality, durability, and functionality.
In fact, in some cases, a premium price can attract more customers. Perceiving something as a luxury or best in class, they’re expecting to pay more. A low price might be a red flag that creates doubts in the potential buyer’s mind.
Additionally, if something is free or cheap, they have far less motivation to invest in the product and glean value from it. Particularly for products with a long learning curve or onerous onboarding, if the customer can walk away without feeling the pain in their pocketbook, it can increase churn and reduce adoption and usage.
Be Wary of Offering Options
We’ve all clicked on the “Pricing” link and seen a matrix of prices and checkmarks for what’s included with each variant. Basic, Pro, Enterprise, etc., are all ways of packaging up value and giving it a relative price.
You might assume most people will gravitate toward the “middle” and pick an option that offers more features and benefits. But buyers are more likely to select the cheaper choice. This selection is even more prevalent when they know they can always upgrade later on if they find they need the extra benefits of a high-priced tier.
Until they’re using the product, users may not realize they would gain much value from the more expensive options. Fear of overpaying can lead them to take the cheaper route, resulting in less-than-awesome user experience and increased churn.
We also shouldn’t forget that the person doing the buying isn’t always the same person that will be using it. The buyer persona may have no idea that features only available to “Pro” users are essential to their use case.
If you’re offering tiered pricing, be sure the cheapest choice provides meaningful value to users. And if you were counting on a large percentage of buyers picking the most expensive (and profitable tier), you might be in for a rude awakening.
Turn Scarcity Into Urgency
When a customer knows a product will always be available at a particular price point, there’s little motivation to pull the trigger until they need it. Why lay out cash now for something they won’t use for months to come?
But companies can pull revenue forward by creating urgency. There are many triggers, but a reliable one is creating scarcity (or at least the illusion of it).
Offering limited-time packages, promotional offers, add-ins, and the like can get buyers off their laurels and prompt a purchase sooner in the process. They don’t want to miss out on a great deal of benefits that won’t be there in the future.