6 minute read
Learn the importance of making data-driven product pricing recommendations and explore tips to gain stakeholder support.
Would you pay $100 for a cup of coffee? How about $100,000 for a sofa? We often take pricing for granted, but setting the right price can be a linchpin for a product’s success. For product professionals, making informed pricing recommendations is an essential skill.
Read on to learn why making data-driven, thoughtful product pricing recommendations is important, explore steps for making price recommendations, and learn tips to help you secure stakeholder support.
- Defining pricing recommendations
- Why are price recommendations important?
- How to make product pricing recommendations
- How to gain support for product pricing recommendations
What are product pricing recommendations?
Pricing is a simple concept – the amount of money you ask customers to pay for a product. Money can change hands in a few ways, from a single transaction to a subscription model, a pay-as-you-go structure, or another method that makes sense for your product, customer, and brand.
Product pricing recommendations are plans for pricing a product based on market data, competitive insights, and strategic direction.
Why are price recommendations important?
Pricing recommendations are essential for several reasons. Fundamentally, you don’t want to set pricing based on wishful thinking or guesswork. First, forming product pricing recommendations requires research and insight into your market. It requires you to look at data to make clear-eyed and informed decisions about whether your product truly solves a market problem, whether your market is willing to pay for it, and whether you can generate a profit from it. Second, making solid pricing recommendations necessitates communication with different teams and stakeholders to understand the impact of setting or changing a price. Proactive communication creates alignment and buy-in for your recommendations.
Pricing Factors to Consider
When you make product pricing recommendations, you need to consider several important factors. The goal is to make recommendations that not only set the price but are informed by market data and align with strategic business goals. We’ll share some steps you can follow to make a pricing recommendation in the next section, but here are some considerations as you begin the pricing process.
Companies may adopt different pricing models for their products.
- We are most familiar with per-unit pricing, such as the price for a single car or single box of cereal. Per-unit pricing extends to per-seat pricing for SaaS products. Conversely, the concurrent users pricing model sets prices based on the number of people who can access a service or application simultaneously (think databases or streaming video services).
- Per-usage pricing bases prices on how much you use the product or service, such as utility bills like electricity or water.
- Site license pricing is another common model. This model sets a flat fee for a group license, preventing the headache of managing individual licenses for many users. It is most common in large companies.
In your personal and professional career, you may also encounter per unit of infrastructure, revenue share, or cost savings price models. Essentially, pricing strategies are how you approach pricing. Common pricing strategies include:
- Cost-plus pricing involves adding a fixed percentage to a product’s cost to determine a selling price. The fixed percentage guarantees a profit, but this is not a nuanced solution for pricing.
- Value-based pricing strategies price products based on the value they provide for the customer. Value-based pricing goes beyond the simplicity of the cost-plus strategy because a customer may feel that the product delivers a value greater than the standard percentage added by cost-plus. Conversely, a customer may think that the product doesn’t provide sufficient value to justify the price, in which case cost-plus would set a price too high for the customer.
- Market segmentation strategies tailor pricing to different market segments based on factors like customer type or other types of transactions. These strategies allow companies to maximize their profitability for each segment.
- Portfolio pricing and bundling occur when companies sell products as part of a broader portfolio or group of related products. Portfolio pricing considers how selling the overall portfolio impacts pricing for the bundle or pricing adjustments for individual products.
Other pricing strategies might include but are not limited to, dynamic pricing, price skimming, penetration pricing, and competitive pricing.
How to make product pricing recommendations
Once you’ve done your background research, explored possible pricing models, and investigated pricing strategies, it’s time to make your pricing recommendations. Here are some simple steps you can follow to make sure your price recommendations are solid.
Step 1: Conduct Market Research and Competitive Analysis
Before you begin any pricing exercise, you should conduct market research and discovery. Doing so will help you better understand the overall market, customer needs, preferences, and behaviors. Then, look beyond your customers and dive into your competitors’ offerings. What products are they selling, and how are those products positioned in the market? How are they pricing their products, and can you glean any insights into their pricing strategies? Take the time to investigate and answer these questions because they will help inform your final pricing strategy.
Step 2: Analyze Your Product
Now that you understand your product’s market and competitors, focus on your potential customers. Any product should solve a problem in the market. So, what problem does your product solve? What are your market’s pressing needs, and how does your product fulfill them? Any market problem worth solving with a product should satisfy the criteria of pervasiveness (many people experience the problem), urgency (the problem should be fixed ASAP), and willingness to pay (people are willing to pay for a solution to the problem). If they are willing to pay, how much money will they part with to solve this problem? While analyzing the product’s value proposition, it is an ideal time to conduct a price sensitivity analysis to better understand your market’s pricing concerns.
Step 3: Define Your Value Proposition
Once you’ve completed Steps 1 and 2, it’s time to bring your findings together and state your value proposition. Essentially, here, you’ll outline what value your product delivers and how much people are willing to pay for it. You’ll also compare your product and pricing to competitors. Does your product deliver more or less value? At this point, you’ll also establish whether you are asking people to pay more or less for a solution than your competitors are.
Step 4: Determine Cost, Profitability, and Pricing Scenarios
Now, it’s time to determine costs and profitability. Cost is the total cost of creating and distributing products. To ensure that you minimally cover the costs of producing the product, you can determine a pricing floor or set a specific minimum profit margin. You can develop pricing scenarios once you’ve established your costs and desired profits. Modeling different pricing structures and adjusting different factors like demand, competitor reactions, and impacts on market share. Evaluating different pricing models helps you plan for various scenarios and project financial outcomes like cost, revenue, profit, and market penetration, and you can make informed pricing recommendations.
Step 5. Align Pricing Recommendations to Corporate Strategy
Once you’ve gathered data, run models, planned for different scenarios, and come to a solid recommendation, you should double-check that your recommendations align with corporate strategy. Your organization’s overarching strategic goals should inform product goals, which should inform your product pricing. If your company aims to grow revenue, you may provide a different pricing recommendation than if the goal is to retain customers. Whatever conclusion you reach, document your analyses and reasoning. That way, you can make a case for how your recommendations support strategic goals and return to them in the future if needed.
Step 6: Secure Stakeholder Buy-In
Once you’ve settled on your recommendation, it’s time to communicate with key stakeholders. In this step, you aim to secure support and buy-in for your recommendations. Now is the time to present your recommendations, proactively address their concerns, and explain how the strategy aligns with goals. At this point, work with all teams that need visibility on pricing changes or provide input on the final price. Pricing decisions require changes in multiple teams. Sales should change how it communicates price; marketing has to realign its value messaging; operations must change the business systems; and finance may need to change how it tracks performance. Ensuring all teams are aligned now can save big headaches, so we’ll cover this in more detail in the following section.
If you struggle to secure stakeholder buy-in, returning to a previous step may be time to reevaluate your findings and recommendations.
Step 7: Launch Your Pricing Strategy
If you’ve made it through Steps 1 through 6, congratulations! In this final step, it’s time to launch your pricing strategy. Be sure you’ve secured approval and established plans to enact the pricing once it goes live. When you launch your pricing strategy, document the go-live, monitor performance, review, and adjust as needed.
How to gain support for product pricing recommendations
Gaining support for pricing recommendations, much less launching the pricing, can take time and effort. Some pricing recommendations may be viewed as risky because of potential revenue losses, or pricing changes may not be considered worth the time and effort needed to implement those changes.
To account for this potential opposition, engage your colleagues in the pricing recommendation process and collaborate with them at every stage as you research and form your recommendation. The objective is to encourage these teams to become invested in problem-solving and, ultimately, to inform your recommendations.
Think through both which teams to collaborate with and why their input is helpful:
- Sales communicates the value and price to the customer
- Marketing develops campaigns to connect with buyers
- Product understands the product’s strengths, limitations, and capabilities
- Operations determines how to implement the changes
Then, coordinate a cross-functional workshop with each team’s representatives. Diverse viewpoints can be helpful when developing and assessing the pros and cons of different ideas. Each member brings a unique perspective and alternative solutions, and you can set expectations for success as a group. If you can’t get the group together, check in with each person before making final decisions. Taking these steps ensures that you solicit their expertise and input as much as possible, minimize the potential for pushback, address questions, and involve them in decision-making.
Many pricing decisions are made by only one or two people in a business. By engaging different team members and incorporating their supporting data and insight, you’ll improve your chances for support and implementation and your odds of success. It’s simply better business to involve more stakeholders.
