If customers won’t buy it then the business will die. I learned about the price first strategy in this article by Madhavan Ramanujam, board member and partner at Simon-Kucher & Partners. He mentions, “the Root of all innovation evil is the failure to put the customer’s willingness to pay for a new product at the very core of product design.”
Start with Willingness-to-Pay
Most companies focus on features, product / market fit, or revenue potential. The pricing strategy doesn’t enter the equation until the end, but if the customer doesn’t accept your price point then a lot of your development efforts may be waisted. If you start with discussions about price the customer is often not equipped to negotiate and will give feedback to guide the prioritization of features. To get started you should identify:
- A reasonable price for a product delivering this benefit
- An expensive price
- The price that would make this product too expensive?
This will help determine the price floor, ceiling, and roof for your product. The floor is your lowest friction price. Customers think they are getting a great deal at this price. This is a good place to start to help grow a customer base. The ceiling is what a customer would pay most of the time. They need proof of value or justification since this is often the price best aligned with the value of your product. The roof is a price that is almost funny to a customer. You need to adjust the value proposition or build a stronger base before considering this price.
How and What you Charge
There are too many monetization strategies and models to list here. A few popular strategies include subscriptions, dynamic pricing (fluctuate based on factors), or freemium models. Customers need to understand your model and know that it’s “…predictable, flexible, fair, and transparent” says Ramanujam. The way you monetize your product can be a differentiator. When everyone in your market is utilizing a freemium model, a subscription service may attract positive attention from customers. There is also room for new models. Evaluate the feasibility, scalability, and friction to customers when choosing a model to implement.
One For All is Lazy
Not all of your customers are the same. Customers may want the best in class version, immediate satisfaction, or the simple version. There are also very price sensitive customers. Package your product differently for each of these groups. Technology and the internet allow products to be repackaged, branded, and launched as several versions at once. The alcohol and beverage industry is great at this. (That’s Gray Goose vodka in those cheap plastic Kroger bottles at Costco.)
Here is a final checklist to remember:
- Start with Willingness to Pay data
- Choose a Segment Strategy
- Start with 3-4 segments (or fewer)
- Don’t serve everyone
- Describe and Manage EACH segment
Cluster the data to identify segments.
It should be easy to sort customers into segments.
Segments should be recognizably different.
Make sure the market size matches your financial goals and obligations.
The differences in segments require different sales and marketing approaches.