Four Critical Inputs for Pricing your Productized Offerings
When developing a pricing and packaging strategy for new productized offerings, it’s crucial to move beyond traditional cost-plus models and embrace a value-based approach. Many organizations are realizing that launching innovative products requires not only technological changes but also a fundamental shift in how they monetize their offerings. Instead of solely focusing on internal costs and margins, they must consider how customers perceive value, aligning pricing strategies with the unique benefits their products deliver.
Download tools and templates to help you with pricing and packaging.
To achieve this, companies must address four critical inputs:
- Align the product strategy with the overall business goals, ensuring that pricing reflects strategic objectives such as market penetration or revenue maximization.
- Understand the value delivered to customers and assess their willingness to pay by engaging with them directly and employing pricing research techniques.
- Account for all costs to deliver, sell, and renew the product, including often-overlooked expenses like marketing and support.
- Analyze the competitive landscape, not just to benchmark prices but to understand competitors’ strategies and how market dynamics could impact your pricing.
These inputs lay the foundation for a well-informed pricing strategy that maximizes profitability and positions the product effectively in the market.
Input 1: Product Strategy and How It Ties to the Business Strategy
A strong product strategy should align with your business goals and answer how you plan to achieve greater profitability than your competition. Key considerations include defining what you are pricing (e.g., a standalone product, a bundled offer, or a new pricing tier) and understanding the strategic intent, whether it's driving product adoption, acting as a loss leader, or maximizing retention.
For example, Employee Navigator, a leading benefits administration platform, strategically adjusted its pricing model to align with its target market: health brokers. When faced with competition from tech start-ups aiming to bypass traditional brokers, Employee Navigator made a strategic choice to become the most broker-friendly platform. Instead of following the industry standard of charging per employee per month, they switched to an enterprise license model that incentivized brokers to add as many businesses and employees as possible without incurring additional costs. This approach significantly boosted adoption, adding millions of employees to the platform.
Once they captured a large user base through broker partnerships, Employee Navigator introduced small fees for data integration and exchange services, not charged to brokers but to insurance carriers, who valued the enhanced data quality. This strategic pricing shift ensured rapid platform growth while creating multiple monetization avenues, illustrating how thoughtful pricing can drive long-term success.
Additionally, businesses should evaluate key factors like customer acquisition costs (CAC), economies of scale, and pricing strategies (freemium models, network effects, or premium pricing) tailored to the product’s unique value proposition. Companies must also consider external factors like market conditions, regulatory impacts, and long-term demand trends to ensure a sustainable and adaptable pricing strategy. Market positioning and maintaining competitive advantages, such as proprietary technology or strategic partnerships, remain crucial.
Input 2: Value to Customers and Willingness to Pay
Good product pricing is based on the economic value it provides to the customer, such as increased revenue, improved productivity, cost reduction, cost reallocation, and reduced risks. To understand this value across customer segments, engage directly with customers to validate the problems your product solves and gauge their willingness to pay (WTP).
Assessing WTP involves asking questions about current costs and potential savings, understanding if solving the problem fits their budget, and testing reactions to different price points. Techniques like Gabor-Granger and Van Westendorp help refine pricing by determining how much customers are willing to pay and at what price points products become unattractive or remain valuable.
Gather insights through methods like customer interviews, surveys, and pilot programs. One example describes a market research firm transitioning to standardized reports, tailoring pricing to different sectors based on how customers used the research, then testing WTP to optimize pricing. Emphasizing WTP early in a product’s lifecycle is crucial, with a focus on validating that revenue opportunities align with overall market potential before prioritizing margin protection.
Input 3: Costs to Deliver, Sell, and Renew the Product
To accurately price a product, it’s crucial to understand not only the direct costs of delivery, such as labor, materials, and commissions but also the often-overlooked costs of customer acquisition and retention. These include expenses related to marketing, customer service, implementation support, and account management, which are essential for driving expansion and renewal. Costs can be categorized as:
- Direct Costs: Expenses directly tied to delivering the product, like labor, materials, and sales commissions, which increase with more customers.
- Indirect Costs: General expenses not directly linked to a specific product, such as administrative salaries, depreciation, and rent, often requiring allocation assumptions.
One example highlights the risks of underestimating these costs: An IT consulting firm entered the financial services market without fully considering regulatory and specialized staffing costs, which led to underpricing and diminished profits. The key takeaway is that understanding all cost factors is vital to setting price ranges that ensure desired profit margins.
Input 4: Competition
When setting your product pricing, understanding competitor pricing is essential but should go beyond simply knowing their price points. You need to analyze their value proposition, including features, benefits, differentiators, tiered pricing structures, and any bundled discounts or additional fees. It’s also crucial to consider their overall pricing strategy: Are they positioning themselves as a low-cost provider or a premium brand? Do they bundle products or offer special deals?
Additionally, take into account the market context, such as economic conditions, target customer segments, and regional variations, as these factors can significantly influence pricing strategies. Your research should include publicly available information from competitor websites, industry reports, and feedback from customer interviews to understand what they’ve paid for similar solutions and their awareness of competitors' pricing.
While competitor pricing serves as a useful benchmark, your pricing strategy should ultimately be driven by your product’s unique value, costs, and business goals to avoid underpricing and undervaluing your product or overpricing and losing market competitiveness. Once you’ve gathered these insights, you can design an informed pricing and packaging strategy.
Taking a thoughtful and strategic approach to pricing and packaging new productized offerings is essential for long-term success. By focusing on the four critical inputs—aligning your product strategy with business goals, understanding the value to customers and their willingness to pay, thoroughly assessing all delivery and renewal costs, and analyzing the competitive landscape—you can ensure your pricing strategy is well-informed and effective. These inputs work together to help you avoid common pitfalls like underpricing or misaligning your offering with market expectations. Ultimately, this comprehensive approach allows you to create a sustainable and profitable model that maximizes value for both your customers and your organization.
To learn more, check out our new book, Commercialize: How to Monetize, Sell, and Market Productized Offerings in B2B Professional Services, written by Eisha Armstrong, Jason Boldt, and Sean Gillispie.
Don’t forget to download the tools and templates that come with Commercialize! These resources are designed to help B2B firms effectively market, sell, and scale their productized offerings. From pricing strategies to go-to-market plans, these tools will guide you in turning your ideas into action.