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Top 3 Things to Consider when Pricing your Product

As a Product Manager, pricing your product is often a hard decision to make.

It's a high-stakes balancing act, where the outcome can significantly impact your product's success, your company's profitability, and even the perception of your brand in the eyes of your customers.

You do all the math on the costs, talk to a bunch of customers, look at endless data points, and you’ve released the right features - still, no one’s paying the price!

It’s a situation that ain’t good. It comes to a point where you begin to lose faith in yourself as a PM. You are short of answers to the questions that the internal stakeholders throw at you.

So where does the problem lie? It’s definitely not the product for sure you know. It’s the price. But why is it a problem?

Well, the reason isn’t always a bad feature, poor value proposition, or wrong need identification. After quite some observations and analysis of the purchase behavior of customers, I have some answers.

And I would like to share it here with you so you can become a better product manager.

Well, when we say “empathize with your customers” or “be in their shoes”, it really means “live the life your customers live”. I realized that understanding your customers’ needs and pain points STILL isn’t enough. There are a lot of other factors that come into play!

Recently, I found myself doing a lot of shopping! Definitely harsh on my wallet but a great deal of gain on some insights that I excited to share!

I have come to learn that when you price your product you need to bear in mind these key points along with the default ones:

• What stage of the problem does your product come to as a solution?

• Customer Lifetime Value (CLV)

• Value proposition

Let’s take a deep dive into each of these.

1. What stage of the need/problem does your product come to as a solution?

Every product, in essence, is a solution to a problem. But what often goes unexamined is not just the problem it solves, but the stage of that problem's lifecycle your product addresses.

Are you stepping in at the early stages, when the problem is just emerging? Or is the problem at the mid-stage? Or, are you providing a solution for a problem that's already well-known and saturated with alternatives?

Understanding the stage of the problem you're tackling shapes your approach, from product development to marketing and user adoption, and finally - pricing. Are you innovating and creating new markets, or are you refining and competing within established ones?

To help you understand this way of thinking better, let me give you a simple example. When you launch a website, there are a lot of steps you go through to actually get there. Most of the time, all these steps are executed using several different products.

First, you buy a domain name for your website from a domain marketplace say Namecheap. Then, you need a place to host all your website files, so you purchase a hosting like HostGator.

Then, you want a content management system to publish content on your website, for example, WordPress. Then, when you need a good premium theme you may hop on Theme Forest or Envato.

Notice how different products solve the main need of the user part-by-part each? Now, we do know all of this.

But what does this tell us? Well, your customer approves of your product’s price after considering how much they’ve paid in the previous stage(s) of the problem and how much more they got to pay further.

This is one type of price sensitivity. Especially seen in B2B product customers.

2. Customer Lifetime Value (CLV)

Your product is more than just a one-time transaction; it's a relationship. Every customer who chooses your product represents not just a single sale but a potential stream of revenue over time. This is where Customer Lifetime Value (CLV) steps into the spotlight.

As a product manager, how you price your product has a profound impact on CLV and vice-versa. It's not merely about maximizing the immediate revenue from a sale; it's about nurturing and growing that customer relationship over the long term.

Understanding the Significance of CLV:

Imagine your product as the foundation of a long-term relationship. Each customer who chooses your product initiates a journey, and the path they take can lead to a cascade of benefits for both them and your business. This journey is where CLV comes into play.

Beyond the Transaction: When a customer makes that initial purchase, it's not merely a transaction; it's the beginning of a potentially enduring connection. They enter your ecosystem, experience your product, and form impressions about your brand. It's the start of a story, not just a single chapter.

The Price-CLV Nexus: Here's the crux of the matter: Your pricing strategy has a profound and reciprocal relationship with CLV. How you set your prices directly influences the length, depth, and quality of the customer relationship you're building.

Nurturing Relationships: A thoughtful pricing strategy can nurture and grow this relationship. It's not about squeezing every dollar from a customer in a single transaction; it's about creating a pricing structure that encourages ongoing engagement, loyalty, and repeated interactions.

Long-Term Revenue Stream: Every satisfied and engaged customer represents not just one sale but potentially a series of purchases over the customer's lifetime. By pricing your product strategically, you can maximize the revenue you generate from each customer throughout their journey with your brand.

Factors to Consider in Pricing for CLV:

1. Retention: Pricing decisions should consider how they impact customer retention. Higher initial prices may lead to lower churn if customers perceive your product as high-value.

2. Expansion: Consider how pricing can encourage customers to expand their engagement with your product. Can you introduce additional features or services that provide added value?

3. Loyalty: Offering loyalty incentives or discounts for long-term customers can boost CLV by fostering loyalty and continued engagement.

4. Cross-Selling and Upselling: Pricing tiers or models should be designed to facilitate cross-selling and upselling opportunities, encouraging customers to explore more of your offerings.

5. Customer Satisfaction: Ensure that your pricing aligns with the perceived value of your product. Satisfied customers are more likely to continue their relationship with your brand.

The Long-Term Perspective:

In essence, your product pricing strategy should be viewed through the lens of a long-term partnership with your customers. It's not just about the immediate sale; it's about setting the stage for a mutually beneficial journey where both you and your customers prosper over time.

3. Value Proposition

While pricing involves numbers and figures, the most critical factor might not be numerical at all. It's the elusive concept of 'value proposition' that often carries the most weight in the minds of your customers.

It's easy for product managers to get caught up in the mathematics of pricing—costs, profit margins, competitive analysis. But what if I told you that, in the eyes of your customers, the price tag isn't just about numbers? It's about the perceived value.

Here's some food for thought:

1. The Perception-Price Link: Think about how the perceived value of your product affects the price customers are willing to pay. A compelling value proposition can make a seemingly high price seem reasonable, while a weak value proposition can make a low price feel like a rip-off.

2. Differentiation and Competitive Edge: Consider how your product's unique selling points and features tie into the value proposition. Are you clearly communicating these advantages in your pricing strategy? A strong value proposition can justify higher prices in a competitive market.

3. Customer Psychology: Dive into the psychology of pricing. What message are you sending to your customers through your pricing? Does it align with the value they expect? Understanding the psychology behind pricing can lead to more effective pricing strategies.

4. Loyalty and Long-Term Value: Reflect on how a robust value proposition can build customer loyalty and long-term relationships. Are you pricing in a way that encourages repeat business and customer retention? Your pricing decisions today can impact the lifetime value of your customers.

5. Market Positioning: Contemplate how your product's value proposition contributes to its positioning in the market. Are you aiming to be a premium, mid-range, or budget option? Your pricing should be consistent with your chosen position.

Key Takeaways for Product Managers

1. Problem Stage Perspective:

• Understand where your product fits into the lifecycle of the problem it's solving.

• Tailor your pricing strategy to align with the problem's stage, whether it's emerging, evolving, or well-established.

2. Embrace Customer Lifetime Value (CLV):

• Recognize that each customer represents more than a single transaction; they are a potential source of ongoing revenue.

• Craft pricing strategies that nurture and maximize the long-term value of customer relationships.

3. Elevate Your Value Proposition:

• Realize the pivotal role of your value proposition in pricing decisions.

• Communicate your product's unique benefits and advantages clearly to justify your chosen price points.

4. Pricing Psychology Matters:

• Dive into the psychology behind pricing to understand how customers perceive value.

• Consider the impact of pricing strategies like anchoring, tiered pricing, and discounts on customer perceptions.

5. Competitive Positioning:

• Analyze your product's competitive landscape and position it accordingly.

• Determine whether you aim to be a premium, mid-range, or budget solution and adjust pricing accordingly.

6. CLV and Customer Retention:

• Focus on customer retention and loyalty as drivers of CLV.

• Explore loyalty programs, cross-selling, and upselling to extend customer relationships and enhance CLV.

7. Pricing for Differentiation:

• Leverage your value proposition to differentiate your product in the market.

• Justify higher prices by emphasizing unique features and benefits that resonate with your target audience.

8. Monitor and Iterate:

• Continuously monitor pricing strategies and gather customer feedback.

• Be prepared to iterate and refine your pricing approach based on evolving market dynamics and customer needs.

9. Balancing Short and Long Term:

• Find the balance between short-term profitability and long-term CLV optimization.

• Consider offering incentives or discounts to nurture customer relationships, even if it means sacrificing immediate gains.

10. Customer-Centric Approach: - Keep the customer at the center of your pricing decisions. - Ensure that your pricing aligns with customer expectations, perceived value, and satisfaction.

11. Think Beyond the Numbers: - Remember that pricing is not just about numbers; it's about the story you tell about your product's worth. - Engage customers emotionally by showcasing the value they'll receive.

🧃Juicy reads to check out

This section includes some relevant articles/videos, people to check out, and links you might find interesting from around Product management.

👉🏻 Jules Walter shares how to develop product sense. (Link)

👉🏻 Tony Fadell shares the first secret of great design. (Link).

👉🏻 ProductPlan shares the best tips competitor research for product managers.  (Link)