Product Pricing

Earlier today I got into a pricing discussion with a fellow entrepreneur. We were talking about all the usual topics like number of plans, positioning in the market, and competitor pricing. Then, I shared the biggest pricing mistake we made at Pardot in the early years: our pricing model didn’t grow well with the account. Meaning, as our customers became more successful, and got more value from the product, there was little opportunity to capture more revenue. Eventually, we shifted from pricing based on email volume to pricing based on the size of the database, and that made a huge difference.

Here are a few thoughts on product pricing:

  • Consider having two value axes: one based on functionality/modules and one based on usage (e.g. seats or metered)
  • Err on the side of being too expensive as it’s easier to give a discount to win a deal and customers are more likely to give pricing feedback when things are more expensive (no one ever tells you your product is too cheap and they’d pay more)
  • Balance capturing the most value with the pricing plans vs making them easy to understand (lean towards keeping things simple)

Pricing is an area many entrepreneurs struggle with, especially if the product isn’t in the market yet or only has a few customers. As the business develops and more prospects consulted, pricing becomes more obvious. Even then, make sure and capture more value as product usage grows.

What else? What are some more thoughts on product pricing?

4 thoughts on “Product Pricing

  1. I’ve read that newbie entrepreneurs are particularly tempted to set their prices too low in order to get their product to sell well, without consideration for the many unforeseen future costs of doing business on a larger scale. This is especially problematic because it sets up the expectation that that is what your product is worth and makes it difficult to raise prices later. Plus, there’s always someone else who can do what you do a little cheaper. As a rule of thumb a hardware product should probably sell for something like 2.5 times its BOM cost, but then again just multiplying by a set number is ill-advised. Your selling price is ideally as high as the market will bear for your product.
    Of course, I’m speaking from knowledge 100% acquired from books rather than experience. All I know for certain is that this topic is rabbit hole that goes much deeper than it first seems. I’d love to read about more of your experiences with it David.

  2. Hi David. Thanks for this! This article helped me get some clarity around my pricing strategy for a new product I am launching.

    Quick question : How does the potential market size impact the price point?

    When you launched Pardot did you research the size of the potential market and then say “ok we are aiming for xx% of the market… Which will give us a break even point?” Or did you work on a fixed number of users regardless of how much of the potential market it meant?
    The reason I ask is because it’s very easy to say that a new product has potentially 500 000 users therefore we can aim for 10% and thereby charge xxx rate… And that projection will impact any valuations that the project will get. But how do you decide what is actually feasible?

    Maybe this should be an offline discussion? 😄

  3. Great points, as usual, David. I’d add that before you think about pricing, think about how your customers get value from your product. This may be based on how many people use it, how often they perform a certain task, etc. Then align your pricing with the key value metric. Also, remember that your pricing isn’t carved in stone. You can always preserve legacy pricing for existing customers, while offering a completely new pricing model for new customers.

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