5 Questions to Ask When Determining Pricing Strategy

5 Questions to Ask When Determining Pricing Strategy

Determining how to price a new product or service can often feel like more of an art than a science. Of course, you need to charge enough that you are covering your overhead AND making a profit, but there’s a fine line between too low and too high. Too low and you could leave prospects with the impression your product/service is somehow lacking value. Too high and you’ve scared them away completely.

dollar sign

Here are a five questions you need to answer before you create your strategy:

  1. Production Costs – Do you have a clear picture of what it costs to create and deliver your product/service? This is crucial. You can’t determine if you are covering your costs if you don’t have a crystal clear view of what it costs you to create and deliver it in the first place.

  2. Competition – Do you understand what your competitors are charging? Look at competitors at different levels – not just those who compete directly. Are there companies with a similar product/service who cater to a different size client than you do? Great. Make sure you understand their pricing structure as well. 

    To take it a step further, do research to find out how your competitors’ prospects and customers feel about their pricing. Forums and discussion groups can be a great resource for this type of information.

  3. Differentiation – Do you offer your customers something your competitors can not? If so, then be sure to take that into consideration. But be honest with yourself, because you will have to clearly justify that higher price to prospects.

  4. Pricing Flexibility – Is there an opportunity to offer different levels or to offer bundle pricing? People like to have options, plus it provides your sales team with flexibility when it comes time to make a deal. 

    Consider “pay as you grow” pricing over “fixed price” models. For example, tiered pricing, volume based discounts, or metered billing. Bundled pricing can be as simple as breaking up your product or service into components and charging separately for each module – with discounts typically kicking in as you buy multiple modules. When you combine component pricing with tiered/metered pricing, now you’re really broadening your customer base.”Telefonica has calculated that if you bundle and target offers effectively, you can increase your revenues by 25 times – not 25 percent, 25 times!

  5. Customer Base – What kind of customers do you want to target?
    • Targeting a smaller market that values your product more will allow you to charge a higher price. This often means specialized industry solutions.
    • Targeting a mass market with a lower priced product will allow you to sell more.

Determining the price for your products/services is an important first step in your go-to-market strategy. It’s not just a question of ensuring sales, but is also a direct reflection of your brand. Get it right and you’re sure to thrive. Get it wrong and you may never be able to overcome it.

photo credit: Dollar Sign via photopin (license)

BONUS: Here’s a great video that shows how pricing strategies can be one of the primary differentiators for a company.