A good sales team is like a high powered engine, but pricing your product poorly is like sticking that engine in a lawnmower instead of a Lamborghini.
Setting the right (or wrong) price impacts your business' bottom line. On average, a 1% price increase results in an 8.7% increase in operating profits. Even the smallest changes can have significant results.
Finding the right price for a new company can seem like a daunting task, but here are some tips that you can use to get your team the deal flow they’ll need to hit their numbers. Let's dive in.
How to Price a Product
Identify the value of your product.
Evaluate the unit economics.
Understand the competition.
1. Identify the value of your product.
Does your product provide transformative or replacement value?
Replacement value is created by substituting the existing way of doing something with a slightly better one (cheaper, superior features, more features, etc.). It's an improvement in the process, but you're essentially helping the customer perform the same function they were doing previously.
Transformative value is created by changing the existing way of doing something to one that eliminates the need for the old process. It's an improvement that makes the way you were doing things almost irrelevant.
The first step in pricing your product is thinking about the type of value it creates for your customer and when that value is created.
For example, if you sold a software tool to create video content for their company, you could position the product as an easier way to author and share the videos (something they're doing today that takes more time). Or you could position it as a tool to create a library of videos that are used to find answers to company-specific questions (something they aren’t able to do today).
In the first positioning example, you'd be pitching replacement value: changing the way your customers work. You’d replace the ways they make video content. And the second example would fall under transformative value: changing something they're doing and replacing their existing process.
Replacement value is faster to realize because it solves a problem customers already have, using a process they're familiar with. If you're creating a new product category, think about how your customer handles this issue today. If it's a well-established problem you might still be creating replacement value, otherwise, your sale is likely transformative. This impacts your sales cycle, and the contract value you should target per deal.
2. Evaluate the unit economics.
Unit economics are the costs and revenues associated with the sale of a single product or license. This number can fluctuate but when you’re pricing your product how much margin is in there? If you have a low margin product does your sales team produce the sheer sales velocity to be profitable? This will determine if you can afford to separate the funnel with more sales roles or if you need to rely on other methods (inbound lead gen) to source opportunities.
A tight margin isn’t a bad thing as most new companies will go upmarket, but pricing too low will make it nearly impossible for your sales team to hit their numbers or be viable for your business long-term.
3. Understand the competition.
Once you understand the value you provide and the unit economics of your business, it’s time to take a look at how your market sits today. Analyze the price points of other companies your prospects could buy from.
Who are the high quality-high price competitors?
Who are the cheaper less effective competitors?
Once you look at who is in your market and know where your product stands, you can put yourself in a category of the market that makes sense -- positioning yourself in the gaps of your market.
Are you offering a premium product that has more perceived quality than competitors in the market? If so, you can price your product higher.
Or is there an opportunity to price your product lower than the competition? If you pursue a low-cost strategy, you can stand out from the competition by providing a similar product for less than the competitors.
Either way, an understanding of the competition can inform where you can price without hurting your sales team’s chances of selling your product successfully.
But, what if you sell a physical product, rather than an intangible one, like cloud software?
How to Price a Product for Retail
There are a variety of methods you can use to price your physical product for retail. The pricing method that's best for your business will depend on the industry, market conditions, and the type of product you're selling. Here are a few of the most common retail pricing methods.
1. Markup Pricing
Markup pricing, or cost-plus pricing, is a simple pricing method where a fixed percentage is added on top of the production cost for one unit of product (unit cost). It's most often used by companies who sell retail products.
2. Keystone Pricing
Keystone pricing is where you sell your product at double the cost of goods sold. This is a simple pricing method. But, depending on what type of product you sell, the price could be too high for the value customers expect to receive from the product.
3. Penetration Pricing
A penetration pricing strategy is used by new companies who enter the market and price their product at an extremely low price. The goal of this strategy is to disrupt businesses in the market and entice customers with a price that's much lower than the competition.
When it comes to pricing we aren’t aiming for perfect. In fact, charging the correct price out of the gate rarely happens. Instead, with these tips, you can find an initial price that will help your sales team get the product to the customer and create a lot of value in the process. You already put in the time to make a good product, so go ahead, set that price and start your engines.