What is the difference between price and product?
How to price a product is one of the most challenging and complex tasks a product manager faces. Of course, there are obvious concerns, such as pricing goods too high and turning off buyers. But then, psychological factors also come into play. For example, people tend to
place more value on a higher-priced product. For B2B products, pricing becomes even more complex. B2B product teams must take into account the budgets of their customers’ organizations or departments. And for B2B SaaS products, in particular, pricing strategy gets even more complicated because there are so many pricing options. Will you opt for user-based pricing or pricing by seat (which coworkers in the company can share)? Subscription billing or month-to-month? A single pricing level or
a tiered model offering different levels of service? And which of the main pricing strategies will you apply to whichever pricing model you choose? The list of choices goes on
and on. There is no one-size-fits-all pricing approach for SaaS products. However, your team will need to review the many pricing models available to SaaS companies, select one (or several), and begin testing. This post will answer the question: How should you price your SaaS product? We’ll also outline a process to help your team find the ideal prices for your products. There are
three main pricing strategies: cost-based pricing, competitive pricing, and pricing based on customer value. Let’s briefly review each. With cost-based pricing, a business figures out its total cost to build, distribute, market, and support the product. Then the company sets a price that allows it to earn a profit over this total cost. But as the business intelligence platform Price Intelligently points out,
the cost-based pricing strategy has drawbacks. One problem is that you might not know all of your costs, or your fees might change over time. This problem means your company could price your products too low and lose money instead of profiting even on a product that sells well. Another flaw in this strategy is that your company’s costs don’t matter to your customers. They care only
about how much value the product will deliver to them. The competitive pricing strategy also has drawbacks. Pricing your SaaS products based on your competitors’ pricing will often lead to a race to the bottom. Plus, if you’re priced similarly to competitive products on the market, your customers might conclude that these SaaS solutions are all more or less the same—even if your solution offers important benefits that the others don’t. The third approach is setting your prices based on how much value your product will deliver to customers. This approach is the ideal strategy for several reasons. If you can make the case that your product will deliver significant benefits, then you can charge a higher price, and customers will pay for it. Example scenarios:Jim Semick, who co-founded ProductPlan, has written in-depth about this for Pragmatic Marketing. Here’s how Jim described using customer-value-based pricing when he was part of the founding team that launched the conferencing app GoToMeeting: “When we were determining to price for GoToMeeting, we interviewed dozens of potential customers to gain a deep understanding of the value they might receive from conducting online meetings with our solution. We discovered:
We developed GoToMeeting’s unique $49 “All You Can Meet” flat-rate pricing (an industry-leading innovation at the time). Because the product was SaaS, we had the flexibility to price our product differently from the competition and create a unique product in the market. In a sense, we made pricing a part of the product. It became a differentiating feature that marketing promoted heavily.” Another example scenarioAnother example: Marketing author Bob Bly uses the 10x strategy in pricing his books and other information products according to customer value. He argues that your products should provide yours with 10x the value of its price. If Bly releases an eBook about becoming a better public speaker, he will describe the return on investment to the customer using the value-based strategy. Let’s assume the book costs $20. Bly will explain that if the reader can apply even a few of the book’s tips to become a more effective public speaker, this could lead to more speaking opportunities. Just one possibility will be worth many times the book’s price. If the reader uses a tip or two to become more persuasive in meetings at work, the benefits to that person’s career will be worth far more than $20. Bottom line: The best SaaS pricing strategy is value-based pricing. Step 2: Quantify your buyer personas.The buyers of B2B SaaS products are often not the same people as the end-users of those products. Instead, they are managers, heads of departments, and company executives. Your next step in deciding how to price your products will be to learn who these people are and how best to approach them. Price Intelligently offers this advice for quantifying your buyer personas:
Step 3: Calculate the average customer’s lifetime value (LTV)The lifetime value (LTV) is the total revenue a customer will add to your product’s bottom line, minus the total costs of acquiring and keeping that customer. For example, Jim Semick discusses this scenario in his Pragmatic article: “If you license your software at $25 per month, spend $5 a month delivering and supporting the service, and keep an average customer for 18 months, your rough LTV is: (25-5)*18 = $360.” As products and companies mature, their overall costs stabilize, and those companies can begin enjoying the economies of scale. When this happens, a product team can enjoy revenue streams that increase relative to their costs—resulting in a higher average customer lifetime value. But as Jim points out, your cost-to-revenue ratio could be higher during your product’s early years. Understanding your customer LTV will help you price your products more accurately and strategically. Step 4: Choose a pricing model.SaaS companies price their products using a wide range of models, so you will have many options to review. Here are several SaaS pricing models, along with examples of real SaaS businesses that use them:
When selecting your preferred pricing model, you will want to choose a model that aligns with your customer’s goals and ability to pay. If possible, you should also use a pricing model that allows you to stand out from your competition. Jim and his team at GoToMeeting did this, for example, with their “All You Can Meet for $49” flat monthly rate. Step 5: Experiment and learnAt this point, you’ve identified value-based pricing as your strategy. You’ve developed a picture of your most valuable buyer personas, built an estimate of customer lifetime value, and chosen a specific model for your pricing. Now it’s time to test those details in the market. Today you have many tools and approaches available to make it easy and affordable to learn the ideal price for you and your customers. For example,
ConclusionPricing a SaaS product is complicated and requires a lot of thinking, planning, and research. But if you follow the steps we’ve outlined above, your team will be well on its way to finding the ideal price points for your products. Ready to take the lead on pricing? What are the differences between price and pricing?There is a difference between price and pricing. The price is the amount of money you want for each product unit. Pricing is the process you need to go through to figure out what price to attach to each unit. Pricing, therefore, is a strategic process that you must learn, and use, for business success.
What is pricing by product?By Product Pricing is a pricing strategy in which the by products of a process are also sold separately at a specific price so as to earn additional revenue from the same infrastructure and setup. By product is something which is produced as a result of producing something else (the main product).
What is the link between products and prices?At low prices, small changes in price correspond to large changes in quality. At higher prices, small changes in price correspond to smaller changes in quality. In all cases, however, higher prices correspond to higher levels of the quality.
What determines the price of a product?Price is dependent on the interaction between demand and supply components of a market. Demand and supply represent the willingness of consumers and producers to engage in buying and selling. An exchange of a product takes place when buyers and sellers can agree upon a price.
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