Pinpointing the Right Pricing Model
Striking the right balance between pricing and what the market will bear is part art, part science.
By Diana L. Mirakaj
Regardless of industry or market segment, something every business has in common is the challenge of pricing their products and services. The technology industry is no different. Vendors have to set the right price to make their products affordable to customers, yet with enough margin to allow partners to make money too. Solution providers have to set prices that complement the cost of their vendors’ products and reflect the value of their add-on services.
Striking the right balance between pricing and what the market will bear is often part art, part science.
When considering pricing models, value is a critical component in the equation. The ability to answer a few basic questions plays an integral role in demonstrating return on investment (ROI) for a customer in the process of considering a purchase. What is the value that will be delivered in the short term? What value can the customer expect to realize in the long term? How will making this investment positively impact other areas of the customer’s business?
Pricing should tie directly to value, and value should be equated with business outcomes.
When a potential customer or partner realizes that the value of a product or service outweighs its price, they’ll rarely walk away from the deal, so the outcome must be clear.
The pricing exercise begins with clearly understanding your value. Well-defined capabilities and business outcomes differentiate your service in the marketplace and demonstrate the value your company delivers to a customer. Those capabilities and business outcomes are crucial to the buyer; they create urgency, open the door for problem-solving solutions, and outline anticipated results. They’re the basis of what and why customers buy.
A few things to consider when putting your pricing strategy together:
- Identify Your Customer. No one company can provide all things to all customers; it’s important to understand where you fit in to a customer’s “value chain.” Know your target audience and their buying patterns.
- Keep Basic Economics In Mind. Let’s not forget the rule of supply and demand. If your company provides a unique product or service that few – or no – others offer, this will certainly have an impact on what you can charge.
- Know Your Competition. A little market intelligence can go a long way, so be aware of other players providing similar products and services in the market. While it’s not necessary to set your prices based on your competition’s asking price, it’s beneficial to know what the competition is charging so you can explain your value more clearly.
- Self-Assess. Honesty can be a tough policy, but it’s also a necessary one. While it can be tempting to overvalue the exclusive capabilities of your products and services, it’ll serve you in the long run to temper your valuation and base it on concrete facts. When evaluating quarterly performance, for example, take factors such as feedback on pricing into account. Then take action to make any necessary pricing adjustments.
- Margins. Great pricing models command even better margins. How you price and package your products and services will ultimately determine your profitability.
Since a company’s pricing model is integrated with its revenue and business model, and all are elements of a company’s overall strategy and business plan, getting it right is essential to achieving financial objectives.