What is the right price?

Photo from Unsplash

Let’s start with an interesting Dilbert conversation on pricing to set the stage for this essay:

Dilbert says, “Is it my imagination or is our pricing intentionally confusing?” Coworker says, “It’s intentionally confusing.” Coworker says, “That way you can’t compare our prices to our competitors’ prices.” Coworker says, “Our competitors do the same thing. It’s called confusopoly.” Coworker says, “We all get our fair share of confused customers and we don’t need to lower our prices to compete.” Coworker says, “We use the profits from our anti-competitive behavior to fun innovation.” Dilbert says, “That almost sounds reasonable.” Coworker says, “Now spank yourself and thank me!” Source: Dilbert.com

With that story as our backdrop, let’s begin our essay. I am pretty sure that Pricing is an Achilles’ heel for most start-ups. Let’s assume that the product is great, the technology stack is amazing and there is a relevant market to buy the offering, where is the weakness? Is the right price the weakness? If yes, how do we determine that magic number? I don’t think I have all the answers but i have tried to use a hyper-simplified framework that has worked reasonably well for me and here is how it goes:

(A) Cost-based pricing: This is a very simple form of pricing. One can price the product based on the following cost parameters:

(B) Competition-based pricing: This pricing is based on the pricing of similar products in the market. In other words, the price of Uber services is pretty much the same or similar to OLA. If the product does not have competition in the home market then it might useful to benchmark against potential competitors outside the home market. Once the numbers are known then pricing can be done using one of the below-mentioned strategies:

(C) Dynamic pricing: It is also known as demand-based pricing or time-based pricing. E-commerce companies use this model pretty well where they use certain time events to play with price as they equate reduced price with volumes e.g. low pricing during festival sales (large volume of sales offset the discounts).

(D) Experimental pricing: Pricing is an art and it’s difficult to get it right the first time. Is there a way to experiment with pricing? Yes, indeed:

Let’s now get to the Execution of pricing:

(A) Not knowing the right price essentially means that one has to start with experimental pricing. But, have a deep sense of data which means understand customer’s buying pattern either by recoding it in the product technically or manually.

(B) Start with a baseline price. I.e. use either cost-based pricing or competition-based pricing to arrive at a number and start with that number.

© Apply one of the below-mentioned pricing strategies to play with the experimental pricing, e.g.:

Whilst, this essay may not answer all your questions; this might give you a few points to think about and discuss with your co-founders. Hopefully adds some value!

Originally published at https://www.raghsforte.com on November 16, 2020.

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Raghu Sarangarajan

raghsforte.com | Growth hacking | Product management | Customer success | Entrepreneur | B2B start-ups | ex-SAP