By 2014, Adobe was struggling.
Revenue had flat-lined, a host of innovative new design tool companies were steadily eating away at their revenue & they felt stuck; stuck with legacy architecture & stuck with a revenue model they didn’t feel made sense.
So they decided to change their pricing model.
To move away from a one-time purchase model, to a simple cloud-based subscription model.
I.E. Rather than a big, expensive decision to make upfront, you could now test out which tools might work for you, then pay monthly for continued access.
The result?
A 3x increase in revenue in just 6 years & the share price up 370% in a similar time period.
This example hopefully goes to show:
Pricing matters.
In the best case scenario (e.g. Adobe), it can become a key differentiator that unlocks a transformative amount of revenue.
In most cases, it will mean the difference between profitability and bankruptcy.
At a minimum, getting pricing right will unlock more revenue (particularly important in the tech recession we find ourselves in).
In the following article, I’ll break down how to think about pricing, as well as outlining specific tactics to experiment with your own pricing model.
The 4 Levers of Pricing
In theory, pricing is pretty straight forward.
We just need to consider the following 4 things:
Costs: Work out how much it costs to sell a unit, then make sure we price above this (e.g. if it costs $9 to make, charge more than $9)
Volume: As we sell more units, our costs are likely to come down, so we might expect to reduce prices over time. This could be due to economies of scale (more efficient process) or automation (e.g. a machine making a unit, rather than an individual)
Price: Setting the price of a unit so we can get a rough idea of profit (i.e. revenue - cost)
Value: Determining what value a unit will provide to the end customer
In reality, however, setting the right price is far more complicated.
Particularly because of this 4th factor: Value.
Because what does “value” really mean? And who determines it? Us as the product team? Or them as the customer?
When we talk about “value”, we do not mean Objective Value
i.e. We work out all the work put into creating a product, then add 10% on top so we can make a profit.
That mindset focuses on us as the company. It’s selfish & doomed to failure.
We can say, “We worked really hard on this thing. We think it’s worth $10 because it took us $9 make it.”
But the customer doesn’t care.
And history is littered with stories of failure like this:
Fisker Karma, a high-end Electric Vehicle company, bankrupted itself back in 2012 by deciding to charge $100,000 for its first version (largely due to their costs getting out of control during production).
Instead, we must think about Perceived Value
i.e. The value the target customer believes they will get from using your product
How to Charge The Right Price
Unless you work at C-level, you probably don’t have much control over Costs, Volume or Price. Clearly, we can - and usually do - work to try & cut costs. But it’s very product-dependent, so it’s not something I’m going to talk about today (nor is it my area of expertise).
Where we do have control as product managers & leaders?
Perceived value.
Here are 3 specific areas to look at in order to increase perceived value (and therefore, charge more for your product):
1/3 Positioning
It’s easy to think that we’ve done our job by just differentiating our product (i.e. offering features that our competitors don’t offer).
Say we sell luxury Swiss watches.
We could talk about how it tracks time to the millisecond, the quality of the materials, why the hand-made leather strap is so reliable, etc., etc. 😍
And customers probably won’t care. 😴
Instead, you need to think about positioning (i.e. who do we want using this product & how can we target them specifically with our messaging).
For our Swiss watch example, that means instead of listing a load of features & specifications, we might focus on what the customer really wants from this product:
Status? Respect? Maybe a sense of legacy to pass on to their kids?
And we see this positioning reflected in the image & tagline of this advert from luxury watch brand Patek Philippe:
2/3 Stacking Value
Another effective tactic to help you charge more?
Stacking value.
That means including more, varied features that you believe will be perceived as valuable by the target customer.
A good example of this is Amazon Prime.
With Amazon as a basic product, we simply order things relatively quickly & cheaply.
With Amazon Prime, we get things like…
Fast and free shipping
Access to a vast library of films & TV (Amazon Prime video)
Access to a vast library of music
Exclusive deals & access
etc.
All for a few dollar per month!
Feels like a lot of value, right? And I’m sure many of you have Amazon Prime because of all that perceived value. Whether you use all those benefits or not doesn’t even matter.
3/3 Audience-Specific Bundling
Looking at the Amazon Prime example, it would be easy to conclude:
“Ok, so let’s just throw a load of random features in, put a price on it & wait for sales to roll in!”
No. That’s not how this works.
Your stack of value must be specific & relevant for your target audience.
Like Amazon, you might be able to offer all of those benefits as part of a single package (Amazon Prime), but you can likely increase revenue more effectively by breaking that stack of value down into something called “bundles”:
i.e. A group of features that represent specific value to a specific audience.
A classic example of this is the pricing page of any SaaS product:
Rather than having just two bundles (Basic v. Pro (e.g. Amazon v. Amazon Prime)), Slack understands that they have very different types of audience who will want very different things.
Sure, there’s a common core value here (to be more productive as a team). However, Slack creates distinct bundles to reflect the diversity of their audience’s needs:
Free: To help teams test Slack out with no risk (or for very small teams to build a habit around using Slack)
Pro: Targeted at “small teams”
Business: More focus on bigger companies & concerns like data security, compliance, customer support
Enterprise: More focus on huge enteprise companies with features like control over their directory, filtering/finding info on a massive scale
By positioning specific value to each audience, Slack is more likely to attract & convert that audience than they would by simply offering a single price for everyone.
Conclusion
Getting pricing right is not about cost or volume or obsessing over the price point.
These are important, but where we can really experiment as product people is around perceived value.
Therefore, ask yourself:
Are we positioning our product to our target audience effectively? Or are we just showing off how much work we put into the product? And if we’ve differentiated our product, have we spent time thinking about our positioning?
How might we stack more value in our product? Any easy ways to do this without building a load of new, time-consuming features?
And how are we slicing that value? Do our pricing bundles make sense? Who is each one targeted at? Do we have evidence that these bundles make sense?
You would be surprised how small changes in how you position or package value can have a big impact in revenue.
And by pushing to experiment with pricing - and unlocking more revenue in the process - you will help yourself really stand out from the crowd as an effective product leader.
P.S. I’ll be running a live webinar on this topic Monday 18th Dec (5-5.45pm). Follow me on LinkedIn to get the live link