Why do you need a proper pricing strategy?

Josh Boer at VeUp discusses pricing strategy, and the common mistake that technology companies make with it

In the technology sector, pricing is probably the thing that companies are most concerned about yet fail to spend time on. 

Despite investing in exceptional products and attracting customers, many technology businesses remain unclear about their true value to customers and how to effectively monetise this. This is especially true in the fast-growing software market. 

Lacking a pricing strategy is like navigating to a new destination without a GPS. It means not recognising who your customers are, misaligning with approaches that don’t connect, or missing opportunities through pricing that doesn’t reflect your worth. This leaves revenue hanging, exposing your business to risk, especially when economic headwinds prevail. 

So, why and how should you price your solution offer? Remember - the goal of pricing strategy is to maximise revenue.  

We will consider common strategies for technology solution pricing —cost-plus, competitor- based, and value-based—the pros and cons of each and explain why value-based pricing is the attainable ideal. 

Cost-Plus pricing

Cost-plus is the recipe most people think of when they hear “pricing strategy.”  Just total your costs and then add a margin to realise your added value. Typically, these are development costs, such as your own software tools (Atlassian, HubSpot etc), sales and marketing, and other expenses in the business. Stir vigorously and add that generous pinch of margin. 

It’s simple - as long as you know what your costs are, it’s easy to work out. No time-sapping research, no complex analysis, no whiteboarding. The simplest spreadsheet you will ever write. You might even cover your costs. Assuming you know them! Sure, hosting and development are obvious, but ambition will bring sales, marketing, and operations into the mix.  

Plus, your costs will vary. If you are using cost-based pricing and suppliers change their prices, you can’t be tweaking yours continuously to maintain margins.  

Remember, your customers don’t care about cost, they care about value. 

For software in particular, the unit cost of delivering one potentially profitable account can be low. It’s the value your customers derive from your solution that counts; not how much you pay your accountant. 

Competitor-based pricing 

Every technology business I ever worked for was often obsessive – even paranoid – about competition. Sometimes with good reason but often this counter-productive approach would have been better replaced by more focus on customers. 

For a new market entrant, competitor-based pricing feels instinctive. Find an entry point, preferably mid-range, then evaluate competitors to get a fix on it.

Again, it’s simple. A trip around your competitors’ yields the data you need for your ‘pricing strategy’. By pitching somewhere in the middle, you anchor yourself for customers who will feel comfortable (but not necessarily excited) with your positioning. 

Plus, there’s safety in numbers.  If you’re in a competitive market (and who isn’t?) mid-range pricing will be closer to what the market can sustain. Until that next ultra-disruptive player arrives.

However, ultimately its not your strategy, its the market’s strategy. If your purpose is to offer customers something different to what is already out there, offering more value and a better experience, why bother? 

Value-based pricing 

This could as easily be called "Customer-led pricing". Instead of looking inwardly at yourselves, or around your competitors, look outwardly to the people who matter: your customers. 

Here’s why it matters and works.

Willingness to pay: This is why you ask prospects to identify the value in your solution.  Competitor-based pricing only goes so far. If they’ll pay $50 per seat or per unit for your competitor, why not for you? The point is your product should be different. It should offer more value, and it should be priced differently as a result. 

Product/market fit: Nearly every software vendor has the ubiquitous ‘Pricing’ page on their website – normally between ‘How it Works’ and ‘About Us’ in the top menu. Pricing isn’t just about the number on that page. It’s about how you package and target your solution. 

Product/Market Fit helps you understand what customers want, and what to develop when. Beyond your Minimum Viable Product (MVP) your roadmap should be demand-driven, with a generous topping of your own innovation. 

Customer relationships: It’s a reasonable chance that your customers’ opinions will reflect the behaviours of decision makers elsewhere in your target market – so ask them. 

In fairness, this is time-consuming and unlikely to be 100% proof. Even the best-informed price sensitivity measurements and feature analysis will only get you towards the right positioning. 

But on balance, these strategies bring you closer to the ‘truth’ of pricing, affording an accurate perspective of where price points should be for different customers. 

You can typically start at a higher relative price point based on willingness to pay. As you add value to your MVP and learn more about your customers you can identify premium pricing opportunities. 

Whatever your approach, you should be re-assessing your pricing strategy using these inputs every 6 months, with the goal of increasing value generated. 

Unsurprisingly, the most value-generating pricing strategy for information technology products is value-based. When your purpose is to create that value for your customers, embracing value-based pricing can give customers what they want, while retaining them for the long term and maximising your profitable growth opportunities. 

Josh Boer is VP of Sales EMEA at VeUp

Main image courtesy of iStockPhoto.com