I want to update my pricing strategy. Where do I start?

Hi Jock,

My product currently has one tier of per-seat pricing for all customers. I want to change my pricing strategy to cater differently for SMEs and enterprise customers. Where do I start?

Thanks,

M

Hi M,

There’s lots to consider about pricing strategies, so here’s a potted summary of a few things to think about.

Kano model #

Given you want to differentiate your pricing for different user / customer segments, one starting point to consider is the Kano model. This is a way to assess how different features of your product are valued in different ways by users. Remember that all features become less delightful (and move towards being expected or baseline) over time.

When the iPhone launched, a touchscreen was unexpected and delightful. A few years later, a mobile phone without a touchscreen was considered unacceptable. And to come full circle, some people would now regard a phone without a touchscreen as delightful (albeit quirky or retro), particularly if they’re trying to cut down screen time or curb a social media addiction.

Further reading on the Kano model #

Unexpected delights – a geek’s guide to the Kano model – I Manage Products

I Didn’t Know I Needed That!: Finding Features to Satisfy Your Customers – Mike Cohn

Pricing strategies #

It’s also worth thinking about why you want to change your pricing strategy. What is the desired effect of the change? How will you know whether the changes have worked?

Are you trying to solve a problem that users / customers / partners experience?

Are you trying to solve a problem facing your organisation?

Be careful about making changes to your pricing solely to benefit your organisation. Your customers will quickly figure out whether the changes benefit them also, or whether they end up worse off as a result. A couple of years ago, Clip Studio Pro was a notable example of how such a change in pricing strategy can cause a PR uproar. Reddit also annoyed and alienated its user base with pricing model changes, leading to protests for most of 2023.

Pricing is a connected system, so think about the outcomes in terms of finding a way to achieve one thing without adversely affecting another thing.

Further reading on pricing strategies #

Don’t Just Roll The Dice – Neil Davidson

Subscription Pricing Models: 4 Strategies for Growth in 2023 – Price Intelligently

How to Price a Product – From One SaaS PM to Another – Janna Bastow

Software pricing demystified – Rich Mironov

Price elasticity #

Another concept to think about is price elasticity. In simple terms this means is how sensitive your customers are to changes in price. Customers may tolerate a certain increase in price, but at some point they will start to consider the price too high, and will seek an alternative (or do without).

The tolerance to price changes customers have is also related to how much they need the product. If the product is a must-have, their tolerance will be probably be greater. If the product is a discretionary purchase, then less so.

It is possible to run experiments to test the effectiveness of your pricing, but it’s generally thought to be not a great idea to split (A/B) test different prices for the same product to different groups of customers. If anyone sees both prices, the customers who paid the higher price will understandably feel ripped off.

Further reading on price elasticity #

A Refresher on Price Elasticity – Amy Gallo

My product management toolkit (28): testing price sensitivity – Marc Abraham

Pricing Experiments You Might Not Know, But Can Learn From – Peep Laja

Units of value #

Pricing is simply a way for two parties to agree on the value of a product or service by exchanging it for something of known value (money). Another thing to consider is how each segment of your customers thinks about their usage of your product. What are their units of value when they use your product?

Does your product add value to specific individuals, meaning a per-seat licence may be appropriate, or to the organisation as a whole, in which case, a site licence may work better?

Or is it more of a utility, like electricity or water, where it doesn’t matter who uses it and when, what matters is how much is consumed?

Does the customer derive value from the product all the time, or only occasionally? If all the time, a subscription model may make more sense, but if only once a year (say to do your annual taxes), then maybe a one-off fee each time would make better sense.

If the needs and typical usage of different segments of your customer vary a great deal, for example SME (small to medium size companies) versus enterprise customers, you may need to offer different pricing models to suit each.

Further reading on units of value #

How (Industrial) Hardware Is Different from (B2B) Software – Rich Mironov

Product or Feature? – Rich Mironov

I hope you find the articles I’ve linked for you helpful. Pricing is fun, but there’s a lot to unpack :-)

Cheers,

Jock