One of the most important issues facing companies both in the Internet space and otherwise, is how to price their products.
We've found that one of the best ways to help companies with the pricing problem is to first identify several questions they should consider. While this is not meant to provide an exact price for any product, it does significantly help ensure that many relevant issues are raised.
With this is mind, here are five questions you need to think about when pricing your product. At the end, we'll link you to related articles on our web site that also deal with pricing.
What alternatives do buyers have for solving their problem? Are they aware of these alternatives?
Customers who are knowledgeable about competing products will generally use the prices of these products as a comparison point. Of course, you have to remember that even if clear alternatives don't exist, customers may use any nearby idea as a benchmark. For example, they may put all downloadable software into the category "shareware" and expect a very low price from any downloadable software.
EASE OF COMPARISON
How difficult is it for buyers to compare the products of other suppliers? Can the benefits be easily observed, or must they be experienced first?
Obviously, this is a reason why firms often let customers have a free trial. This lets the customer easily compare the products of different suppliers. Not allowing customers to try out a product whose benefits are not easily observed prior to trial makes pricing aggressively nearly impossible.
Does the product have any unique benefits that differentiate it from any competing products? Do customers feel these unique benefits are very important to them?
Lots of techniques have been devised to determine how important differentiating benefits are to customers (see our tutorial on tradeoffs for this). Placing a price level on this benefit is, of course, what companies are most interested in. Without using an analytic tool, like conjoint analysis, you must resort to survey based methods, like capturing a customer's willingness to pay.
How significant are buyer's expenditures, both in absolute terms and in percentage terms.
This is often an overlooked aspect of pricing. Say, for example, that you sell an add-on to a customer's ISP expenditure, like some new plug-in to help customers more efficiently manage their downloads. If their ISP costs are $19.95/month and you sell your add-on for $5.00 a month, this is a relatively small dollar figure, but roughly a 25% increase to the customer! Expect customers to focus on the percentage, not the absolute.
To what extent must buyers make complementary expenditures in anticipation of its continued use? Are buyers locked into these expenditures?
Buyers are becoming more sophisticated in their understanding of the overall expenditures they must make to use technology products. Expect them to consider this when evaluating how much they are willing to pay for your part of this expenditure system. Having said that, consider how important this question is when you sell a complementary system. For example, companies have long known that it is often best to give away the razor and make money on the blades. Both are needed by the consumer, but understanding how the consumer uses these products makes it easier to figure out how to price the various elements.
While this is just a basic overview of basic pricing issues, there are several good books that you can check out, including the one by Thomas Nagle and Reed Holden in our book section.
Here are some other useful price-related articles on our web site: