Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.
By Gerry Langeler
For all the detailed work that goes into product planning and development in start-ups, I’m always amazed at how little effort is put into pricing those products properly. Yet, it is the act of pricing that determines what value you ultimately receive for all the hard work to spec and build your “next great thing.”
Think about it: How did you determine the price of your product? Was it a multiple of cost? Was it sort of what others are charging, maybe plus something because you deem your product superior, or minus something to get market entry? If you are pricing for a land grab strategy, how much is that land costing you? And if you are creating an entire new category with your product, then what do you do?
It turns out that while pricing can be more art than science, there is science that can be applied. If you want some professional help with what follows, I recommend Mark Paul at Synergy Consulting
. But for free, here’s an approach that has been shown to work.
Take a description of your product’s features, functions and benefits to about ten potential customers. Ask them for no more than five minutes to answer the following five questions:
- At what price would you consider this product expensive?
- At what price would you consider this product inexpensive?
- At what price would you consider this product too expensive, in that you would not buy it?
- At what price would you consider this product too cheap, so you would question its quality?
- What few features would you add that would increase the product’s value to you?
Now, plot the data points from questions 1-4 and connect each question’s points with a line. What you will tend to see is they will intersect to form a four-sided figure that describes the effective price zone you should be considering.
If your current price plan is outside that range, time to go back to the drawing board.
If your price point is inside, good! Now look at the answers to question 5 to see if you can slide the four-sided figure to a higher level with very little increase in development cost or time.
With that, let me share a story that still resonates on this issue. Years ago, I was a young division marketing manager in a $1 billion revenue high technology company (Tektronix). The powers that be decided to bring in a pricing consultant to see if he could help us get more value for our efforts. In the room were all the division marketing heads, and the firm’s Executive VP who was sponsoring the day. After some introductory exercises to get us relaxed and into the flow, the consultant posed this question:
“I’d like to see a show of hands of those of you who think you could raise the prices of your respective products by 1%, just 1%, without suffering any loss of volume.”
Most of us, including me, thought for a moment and said to ourselves, “Well, sure. Just 1% probably wouldn’t make much difference to our customers. They appreciate our product features and high quality enough for that.” Essentially everyone raised their hands.
The consultant immediately turned to the EVP and said, “Your marketing leaders just told you they are knowingly keeping $10 million a year off your bottom line with no loss of market share. How do you feel about that?” Needless to say, you’ve never seen more hands come down faster in the second or two that followed – not to mention all marketing types now with tight stomach muscles hoping the EVP wasn’t looking directly at them.
But he’d made his point. None of us really had enough of a handle on our pricing decisions to know one way or the other what a change in price would mean. And if our initial hands-up responses were even close to accurate, that ignorance was keeping material profits off our income statement.
So, before you get that same tight feeling in your gut that you are leaving money on the table, put the same kind of energy into product pricing that you do into product features. It will pay for itself.