Most of the market isn’t going to buy from you. Because you aren’t using a specific pricing strategy, you’re just going to make your best guess at what the price should be and see how things pan out.ġ. You’re releasing a new product, and it’s time to nail down pricing and get it to market. To illustrate, let’s examine the opposite scenario. You fail to communicate the real value of your product You risk losing business to competitors whose pricing more accurately reflects market sentiment You fail to capture as much revenue as you could Several things go wrong when the price of a product is not informed by a sound strategy: Without an effective pricing strategy, you’re essentially throwing darts in the dark - there’s a chance you’ll hit the bullseye, but you’re more likely to miss the board altogether. If they choose to use a cost-plus pricing strategy, however, with a margin of 50%, they may calculate the total cost of production to $30 per user and so decide to set their price at $45 per user. They’ll capture some high-value clients upfront and then slowly reduce their price over time to widen the pool of potential customers. Price skimming is a strategy where you start by setting high prices - as high as the market can tolerate (capturing maximum revenue per unit early on) - and then gradually lower prices to reach a wider audience as demand reduces.Ĭost-plus pricing is a strategy that takes your total production cost and adds a margin on top of it (typically a percentage).Ī startup entering the CRM market, for example, might perform research and determine that the maximum they can charge for their product right now is $80 per user (using the price skimming strategy). Let’s take two common pricing strategies to illustrate: price skimming and cost-plus pricing (both of which we’ll discuss in more detail shortly). Pricing strategies allow you to make informed decisions on pricing changes and to understand how those changes will be impactful and appeal to your target audience. Your pricing strategy is your methodology, concept, or theory behind your product pricing. How, then, do you determine the optimal price point for your product or service? First, you need to determine the pricing strategy that best fits your revenue and organizational goals. More than that, a company’s pricing contains inherent indicators of value and how customers should perceive that product.Īt a basic level, higher-priced items are perceived as being of higher quality (a psychological phenomenon known as premium or prestige pricing) and vice versa. You need to find the right price, or prices, to maximize market penetration. Of course, by setting prices too high, you’ll alienate certain market segments and risk pricing yourself out of the market. Studies show that a pricing increase of just 1% can induce profit growth of more than 11%. The main reason is that pricing optimization leads to increased profits. So, why is it so crucial to get pricing correct? That “process” (which we’ll discuss in more detail in subsequent sections) is informed by your pricing strategy - the theory and principles behind your product pricing. The operative term in this definition is “process.” Setting your price must not be an arbitrary decision based loosely on market norms and competitor price points (though these factors should be taken into account). Simply put, pricing is the process of determining what you’re going to charge for your company’s products or services. What Is Pricing, and Why Is It Important to Get Your Pricing Right? This guide will dive deep into 9 of the most powerful pricing strategies and outline how to choose the optimal approach based on the type of company you operate. However, many SaaS revenue leaders fail to put this simple idea into effective practice. This leads to improved growth and higher profit. It seems obvious, optimize your pricing strategy to maximize revenue from each customer. This mistake leaves a significant revenue opportunity on the table and is responsible for as much as 18% of startup failures. Unfortunately, many organizations take a “set and forget” approach to pricing and fail to develop a comprehensive, research-backed strategy to determine appropriate price points. Pricing is one of the most crucial and influential levers in driving revenue for your company.
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