Pricing

What is pricing?

We define price as the cost per unit a customer will pay for a product. The price is subject to change since different customers can demand different pricing. In order to differentiate the starting price (pre-transaction) we will refer to it as the list price.

The goal of pricing is to accurately model a product’s value. This is commonly referred to as valuation in finance. Generally speaking, “good” valuation accurately reflects the benefits of the product and how much it costs to create. What determines good and bad? Customer understanding is the major determinate of success. A customer could choose to purchase the product, but if they do not understand the value of the application this can lead to friction or churn later on. Alternatively, a prospect could understand the value of the product but choose another vendor. From a business perspective this is problematic but from a pricing perspective this is still a success. The clearer the value of the product is to customers the greater the quality of pricing.

One example of transparent pricing is Stripe. Many customers have strong opinions on their pricing model which goes to show how well it’s understood. It’s not uncommon to see comments and posts about Stripe rent seeking or taxing the internet. How simple and clear must the pricing be for customers to have such a strong and nuanced opinion! It can be said that Stripe’s pricing model is really good, regardless of the negative or positive sentiment.

Why is pricing important?

Pricing is the most important part of configuration. Poor pricing execution can lead to weak product launches or outright failure. The reverse is also true in that a thoughtful stratagem can open up new markets and opportunities.

Additionally, how you choose to value your products can determine a significant amount of how a business model operates. Specifically metering, rating and customer transparency will require significant adjustments to support different methodologies. Depending on how a business model is implemented the pricing scheme can become challenging to automate. All this goes to say is that pricing is important and understanding the different approaches is well worth the time and effort.

Pricing complexity

Pricing is an expression of a product’s value. Therefore the highest priority to ensure a good valuation is to educate the customer and raise their comprehension of how the product works and its worth. Depending on the product this can be quite challenging since many domains require extensive training to be proficient in. So how do we simultaneously model our complex products and offer an easy to understand price? Most of the time you can’t. If the pricing is too simplistic a practitioner can easily over price. If it’s too complex customers won’t get it and overhead will accrue in pre and post sales processes.

While there is no panacea the best mitigation is to over-correct on customer transparency. If you are using a simplistic model, help customers understand the limitations and issues that cause the price to be higher than expected. If you are using a complex pricing model ensure customers can understand exactly what they are paying for and why. Focusing on transparency will make it easier to deal with questions from prospective and current customers who want to understand what they are paying for.