How Do Software Companies Decide the Most Effective Pricing Strategy?
In the early stages of growth, pricing is one of the defining features of any software startup. Going to market with a product that isn’t priced to offer value is a fast track to failure.
News Group’s Katharine Paine said it best: “The moment you make a mistake in pricing, you’re eating into your reputation or your profits.” You really don’t want to be eating into either of those.
So how do you decide what to charge for your product? Do you look at the competition? What the market is willing to pay? Does it come down to demand? Or do you just pluck a number out of thin air, double it and add 10 percent? Actually, you do all of those things. Except the last one.
First of all, it’s worth understanding what an effective pricing strategy should do:
- Allow you to hit revenue targets — pricing should look to match or exceed financial forecasts to maximize profits
- Accomplish market share goals — pricing will define where your product sits in the market
- Offer value — customers should feel that they receive value for money at every price point
- Be reflective of the market — matching what people expect to pay for similar products or solutions that solve similar problems
- Be compatible with how you need to sell the product, onboard your customers and offer support. Too low a price with too expensive a sales or onboarding model will quickly become a problem
Pricing strategy options
Finding that pricing sweet spot is perhaps the trickiest part of a product launch. Going in too high can alienate potential buyers and inadvertently push them into the arms of the competition. A price point that is too low, however, can make it difficult to cover costs, and can easily make potential clients believe you can’t deliver the value you claim. You need to be somewhere in the middle. Proceeding with one of the following strategies can help you in setting prices that meet your aims.
Penetration can be a successful tactic, but it’s not without considerable risk. The idea is that a product is offered at a low price to increase awareness, boost sales and gain a solid footing in the market. It’s a strategy used by many new companies, but can negatively impact income in the early days.
Done right, however, it can help a product gain considerable traction, allowing prices to be raised over time to reflect market position.
A premium price point promotes exclusivity.
If a product is unique, it’s a great strategy to use, but pricing above the competition means basing an entire brand around the perceived high quality of what you offer. Prospects will expect the best and demand full value for money. Therefore — as well as focussing heavily on marketing efforts, Web design and customer service — it’s wise to offer instant demos as a way to increase buyer knowledge and build confidence in your product.
Popular with apps and some SaaS companies, taking the freemium approach means starting off with a free price tier, then scaling, often according to the number of users. A great way, after a free trial, to encourage customer loyalty. Another variation on this model is to offer in-app purchases; so the core product stays free, then customers can buy premium features and value-added services.
The psychological method is based on buyer purchasing habits — how they react to certain price points. For example, the number 9 is proven to increase sales, which is why $39, $57 and $99 are favoured over $40, $60 and $100. They’re known as “charm prices.” According to William Poundstone, author of the book Priceless, charm prices increase sales by 24 percent. Yes, the slightly lower price represents value, but it’s not really about the saving. It’s about the number.
Psychological pricing is worth considering alongside other strategies. And it is certainly worth split testing against rounded numbers.
Bundle pricing is a common strategy in the SaaS market as it offers tremendous value for the buyer. Products are bundled together and marketed at a lower price than if purchased individually. Bundle pricing can be effective when offered alongside individual projects or when run as a limited-time offer: “Purchase the software bundle now and save 30%.” It plays to the psychology of buyers while allowing for more product sales.
Pricing in comparison with competitors is an easy way to price products for market, but it’s important to take other factors into consideration. Does your product offer something that competitors don’t? Will in-line pricing allow you to achieve market share goals against an already established competitor? Does matching the opposition fit in with your running costs?
Competitive pricing is often not the best strategy to go to market with. It can prove effective when your brand is established, though.
Pricing: The Key Questions
Before pursuing one or more of the above pricing strategies, it’s important that you consider your business and its potential clientele. Answering the following questions will give you a solid base from which to work from.
#1: Who is your target audience?
This is the single most crucial aspect of pricing. Who are you targeting? What industry are they in? What is the size of the business? Is location a factor?
You can segment the business population by company size, geographic location (if required), niches, markets and relationships.
#2: What benefits do you offer?
Look at what you have that the competition doesn’t — what makes your product worth choosing over everything else in the market. If these things are significant, you can warrant a higher price point. However, you should be able to prove these benefits before purchase, through documentation, marketing and instant demos.
#3: Are there any risks?
If there’s a potential risk involved in purchasing your product, reassurances and guarantees should be offered to increase confidence. This may require lower initial pricing or money-back offers.
#4: How does the market look?
Launching a product in a well-established, static market will allow you to price confidently, while an emerging market may require a more tentative approach, like the one deployed in penetration pricing.
#5: Are you aiming for repeat or subscription purchases?
Are you looking to attract repeat or subscription customers or is this a one-and-done deal? Discounts can be offered to returning buyers, while one-off purchases can be sold based on their long-term value, thus warranting a higher price tag.
Once you have a clear understanding of who your product is targeting and where it stands in the market, you’ll be able to confidently introduce an effective pricing strategy. From there, customer service, sales teams and supporting materials such as demos can help sell software benefits and establish market share to meet targets.