Pricing | Product Marketing | Guides

After receiving the ‘OK’ from your key stakeholders, you need to switch your focus to fine-tuning the most essential part of any successful product: a watertight pricing strategy.

Striking a happy medium when pricing is a challenge and will play a significant role in the overall success of your product. If the price point is too low, you’ll run the risk of negating the effort you and your team have put in during the build-up to your eagerly awaited product launch. On the other hand, if you price your product too high, this could drive your customers into the arms of a competitor and increase your churn rate.

Let’s take a look at the ways you can avoid such pitfalls and incorporate a pricing strategy that’s mutually beneficial for you and your prospective buyers.

Let’s take it back to basics.

What’s inside this guide?

Whether you've got a pricing project on the horizon or just want to brush up your knowledge and learn from the best for when the time does come, here's a selection of presentations, templates, and guides to help you through all things pricing.

Part 1: Presentations

Part 2: Templates

Part 3: Guides

There's plenty more where this came from. 👆

Unlock it all in here. 👇

Pricing unpacked

What is a pricing strategy?

A pricing strategy is a model and/or method a company uses to price its product or service suitably and optimize its sales volume and market share.

The process helps companies generate maximum profits, whilst simultaneously taking into account the buyer, as well as trends within the market.

Pricing strategies differ depending on the nature of the company and circumstances, which makes teaching it somewhat tricky because there really is no such thing as a one-size-fits-all solution.

It’s important to do your market research and choose the right pricing strategy because your target audience is going to respond differently to different costs, depending on their circumstances (whether they can afford a premium price), and how other business owners on the market choose to price their products, too.

How to calculate price elasticity of demand

There are many different strategies you can use when pricing your products. But irrespective of which one you choose, there is something you need to take into consideration - price elasticity of demand.

Price elasticity of demand is used to determine how a change in price can have an impact on consumer demand.

There are some products consumers continue to purchase, even if prices increase. For example, milk. If the price of milk increased by 10%, it’s unlikely there’d be a huge change in the demand.

Other products, however, suffer when their price fluctuates. These are known as elastic goods. For example, Coca-Cola. If the price goes up, there are other, cheaper sodas available and the buyer can get their fix elsewhere.

% Change in Quantity ÷ % Change in Price = Price elasticity of demand.

Types of pricing strategies

Product marketers have several competitive pricing strategies to consider. The most common pricing strategies include:

  • Competitor-based pricing
  • Cost-plus pricing
  • Value-based pricing
  • Dynamic pricing
  • Penetration pricing
  • Price skimming
  • Target costing

When choosing amongst these different pricing strategies, you must think about how your audience will react to them, based on their own circumstances, the product’s functionality (whether it’s good enough quality to consider purchasing), and whether it’ll fit in with your other marketing strategies. For example, if your messaging is consistently talking about how affordable your product is, and you choose a premium price, this wouldn’t help your brand reputation.

Or, if you’re a start-up or small business with a smaller customer base, freemium or fixed costs may be a better choice, in order to boost your brand reputation and customer loyalty - you can then choose to raise your price further down the line.

Competitor-based pricing

Organizations using a competitor-based pricing strategy get an indication of how much to charge by checking out pricing structures at rival companies who’re offering products or services similar to their own. When businesses are competing in a highly-saturated market, it’s not unusual for them to opt for this strategy. After all, the slightest price difference can sway a customer's decision in their favor.

Let’s say company A has been designing specialist sales enablement tools to save product marketing teams’ time when producing templates and frameworks. If company B enters the market and offers a similar product priced at $39.99 per month, company A can price strategically and set a monthly cost of $34.99. This pricing strategy offers prospects the chance to solve their pain points at a lower price. As is often the case, there are pros and cons fixed to competitor-based pricing; but we’re a positive bunch here at PMA, so we’re gonna start with the good news first.

For starters, it’s a piece of cake to implement. All you have to do is spend half an hour or so searching your competitors’ pricing pages and to get the info you need. Secondly, to a degree, you’ve got some certainty. After all, if customers are willing to spend $100 for their solution, providing your solutions on par, why wouldn’t they be willing to fork out the same amount for your product or service?

When you use a competitor-based pricing model, you don’t have a pricing strategy of your own - you’re more or less copying someone else’s, in which case, you’re not differentiating yourself, nor are you considering your costs.

With competitor-based pricing, you’re putting your destiny in the hands of the competition. When possible, give the people what they want. Just because people are willing to pay a certain price for something, doesn’t necessarily mean they’re over the moon to be doing so. Show them your hand, let them know why you’re different. You may spring a few pleasant surprises.

Cost-plus pricing

The cost-plus model is essentially adding a percentage for profit to your costs. For example, if the total cost for a pair of trainers adds up to $60 and a company wants to make a 30% profit on each pair, the cost per item would be $78, with an $18 profit.

Remember, this model is more widely used among physical products because their material costs can be easily identified; the same can’t necessarily be said for SaaS products. Nonetheless, if you’re a SaaS business trying to follow this model, look at costs like staff salaries and the number of hours spent building your product.

But remember, pricing based on these costs will more than likely rely on a level of assumption. So, why do organizations lean towards this approach?

Cost-plus pricing advantages

For starters, it’s simple and generates profits. Any product marketer will tell you communicating a price rise is no walk in the park - and they’d be right. However, if you apply this model and your costs increase, there’s a direct correlation to your customers’ price increase too.

Cost-plus pricing disadvantages

The key disadvantage of cost-plus pricing is it doesn’t factor your competitors into the equation. By ignoring competitor pricing, there’s a good chance you could end up charging considerably more and achieving small profits, or considerably less, and giving away potential profits. Another problem with this model is it doesn’t encourage the people who are building your product to be prudent. If you’re not careful, people can go in with the attitude of ‘well, we’re going to add 30% onto however much it costs us to make, so it doesn’t matter how much it costs, we’ll profit anyway’. Wrong.

If your costs become too high, your retail price will be too high, and people won’t buy your product. It also doesn’t take into consideration the customer and what their perceived value of your product is, and how much they’re willing to spend. The cost-plus model is very company-centric, so even if it’s technically beneficial to your bottom line, it can create obstacles for sales because they aren’t able to justify the price; this can result in a lot of discounts which negates the whole point of the model.

Although we mentioned price increases might be easier to justify if the price of materials etc. rise, you have no control over how often and by how much by these costs will go up, and there’s only so many times you can up your price in a given period before customers start to get antsy, but if you don’t reflect the difference in your price, it’ll eat into your profits. It also doesn’t account for unknown costs that come as you grow - like marketing, sales, and new hires.

Value-based pricing

Value-based pricing, a method where you set your price based on how much different customer segments believe your product’s worth.

Consequently, the price you charge can vary from customer-to-customer or segment-to-segment.

Imagine Nike is all set to launch its brand-new shoe (product A) and Reebok has already launched a shoe of their own, (product B).

Both are lightweight, both are targeted towards endurance runners, and both come in a variety of colors. Nike’s running shoe, however, comes with high-performance insoles built-in. Reebok’s doesn’t. Nike’s shoe targets endurance runners who need extra support underfoot, Reebok’s shoe targets all endurance runners.

With value-based pricing, you need to look at what the next best alternative is and how much people are willing to pay. In this case, that might be buying an ordinary running shoe and the insole separately. Next, you need to understand what it is about your product that makes it different, so in this example, that’s the built-in, high-performance insole.

The final (and trickiest) step is putting a monetary value on that differentiator. How much are people willing to pay to have the insole built-in to their shoe rather than buying it separately? To get the answer to this, you need to get out there and do some qualitative research.

Let’s pretend you’ve done the research and the result is shoe B costs $50 and separate insoles set people back $10. However, your customer would be willing to pay an extra $15 to have that feature built-in from scratch. 50 + 10 + 15 = $75. That’s your value-based price.

Value-based pricing advantages

Value-based pricing gets to the bottom of what your customers are willing to pay with more accuracy. Sure, you could argue competitor-based pricing does this because customers are willing to pay for their product (they’d be out of business if not!), but value-based pricing puts your potential customers at the heart of that journey as well as differentiating you from your competitors. As always, never underestimate the value of talking to your customers.

Value-based pricing disadvantages

The biggest downside is the time. Value-based pricing requires a lot more time and resources than the other two methods we spoke about but you know, as they say, if something’s worth doing, it’s worth doing right.

Cost-plus pricing is often considered one of the most simple methods on offer, but target costing is another method used by PMMs when mapping out their pricing strategy.

Dynamic pricing

Otherwise known as demand pricing, surge pricing, or real-time pricing, dynamic pricing is a flexible pricing strategy influenced by market demands, as opposed to a traditional fixed-price structure where prices for goods and services remain the same at all times. The same product or service is sold to different people for different prices.

Factors influencing the price a customer pays can vary depending on numerous factors, including:

  • Customer location,
  • Time of day,
  • Day of the week,
  • Level of demand,
  • Stock levels, or
  • Competitor pricing.

Generally speaking, dynamic pricing is used by fast-paced, B2C businesses, and it’s a price structure that’s logistically more suited to e-commerce because price changes online can be amended quickly and automatically with little-to-no staff input after initial set up. It’s also worth mentioning dynamically lowering prices can increase demand, while dynamically raising them is typically used when there is a strict constraint on supply.

So, how is dynamic pricing automated? Initially, product marketing needs to identify the market factors that’ll make dynamic pricing acceptable for customers. For example, customers will see value in increased prices for a hotel room in a full hotel or a room with a sauna in it, but not for the model of TV in the room or the quality of the sheets.

These market factors are then used to set an algorithm in place, which is used by software agents who work in the background analyzing this data and adjusting the pricing accordingly. In terms of frequency, these prices can be adjusted as often as required - sometimes even up to once every hour.

Although dynamic pricing can work across many industries, it’s most commonly found in hospitality with things like changing hotel room price structures, early-bird tickets to events, and widely across the transportation industry - such as airline tickets, London’s congestion pricing, toll surcharges during busy periods on San Francisco's Golden Gate Bridge or Sydney’s Harbour Bridge, or off-peak public transport.

Consumers see dynamic pricing on a day-to-day basis, whether it’s during happy hour at the local pub, buying tickets to a baseball game, Uber’s surge charge, or from their electricity supplier with peak and off-peak rates.

However, despite being a fixture in modern commerce, the legality surrounding dynamic pricing can be a little grey. It can and has been argued that dynamic pricing has its roots in price discrimination, which is illegal depending on the criteria used. It’s illegal if race, sexuality, gender, or religion are factored in; price discrimination is also a no-go if it violates antitrust laws set up to ensure fair competition in an open market.

Dynamic pricing advantages

There are many advantages to a price structure as flexible and fluid as this, and price changes don’t always have to mean increases. Flash sales can help businesses or consultants reach targets, and pricing can be dropped to boost sales in slow periods or for a less-popular product. Price drops can also help put bums on seats in the lead-up to entertainment events like sporting events or music concerts, for scheduled flights, or to fill empty hotel rooms, because when it comes to service-based sales, open seats equates to zero revenue.

Being able to raise or decrease pricing depending on product availability is another benefit of the dynamic pricing structure. For example, it’s much easier and cheaper to grow citrus fruits in the summer months, creating savings for growers that can be passed on to customers. This, in turn, allows growers to increase prices in the winter months where growing citrus is more labor-intensive and expensive.

Consumers often see this in their local fruit and veg shop or supermarket. Of course, prices are often increased too. Maximizing profits is a key goal for any business, and dynamic pricing allows businesses to compare their price point with that of the competition and increase it if there’s wiggle room. After all, there’s no point selling a product as cheaply as possible if customers would be willing to pay more for it, while still seeing value for money.

Dynamic pricing negatives

On the flip side of all these benefits, it’s important to remember that everyone hates feeling ripped off, and many customers who notice varying pricing will feel like they’re being taken advantage of, or that they’re less important because they haven’t been given the best price. This can lead to customer alienation, future loss of sales, and lack of customer loyalty.

Consumers don’t always look at the possibilities that dynamic pricing could result in better bargains, but can assume it’s being used to charge them more money than the next person. So the issue to consider first and foremost when adopting dynamic pricing is the perception of fairness. Many shoppers these days are very aware of dynamic pricing, even if not on a conscious level.

Savvy shoppers identify themselves as ‘bargain hunters’ and shop around for the best price at the best time. This means many customers may hold off purchasing a product until the best possible moment, skewing product demand statistics.

Although a price war’s the last thing anyone wants, this can be a byproduct of dynamic pricing. Price wars can force prices so low that they become unsustainable, which isn’t good for your product, your competitors, or the customer. Automated adjustments will help ensure this doesn’t occur as pricing models are regulated.

Penetration pricing

When companies are launching a new product, there’s one thing they’re interested in: customers. Money is delightful, but if you don’t have any customers buying your product or service, you don’t have any sales.

To reduce the risk of this occurring, companies use penetration pricing. They price their product lower than their competitors to prompt an initial surge of sales during the initial release period. Penetration pricing pulls on the heartstrings of the prospect, with the strategy targeting the customer’s urge to secure the best deal possible.

Introducing comparatively low pricing means the customer will earmark the brand as the more affordable option, and you’ll always win a fan or two when there’s money to be saved. This pricing strategy is in operation more often than you may think. For example, streaming services, such as Spotify and Netflix continue to pit their wits against the big-boys of music and film/TV, while Android and Samsung position their products as the more affordable alternative to Apple.

Penetration pricing advantages

Penetration pricing can work wonders for your brand if the market is right. Given the lower-price of the products on offer, this generates increased customer interest, brand loyalty, and eliminates competition from companies who simply cannot afford to match your offer.

Penetration pricing disadvantages

On the flip side, when penetration pricing is applied in the wrong market, this can lead to a poor customer experience, generate price wars, or even lead to people forming a poor perception of what your brand represents.

Penetration pricing is often confused with price skimming, when in fact, they’re two different approaches. Here’s a brief insight into price skimming to round off our insight into your pricing options.

While some companies adopt the penetration strategy and price their product at a lower price, advocates of price skimming adopt a different approach, instead opting to charge a high price at launch, before reducing the price as time goes on.

This method is particularly effective when the product or service in question is part of a premium market, or if the target customers don’t have any other choice and pay the price because it’s not available elsewhere.

Price skimming

While some companies adopt the penetration strategy and price their product at a lower price, advocates of price skimming adopt a different approach, instead opting to charge a high price at launch, before reducing the price as time goes on.

This method is particularly effective when the product or service in question is part of a premium market, or if the target customers don’t have any other choice and pay the price because it’s not available elsewhere.

Price skimming advantages

Price skimming is beneficial because it can help organizations recoup the money they’ve spent during the research and development processes. Take Apple, for example. They reap the benefits from short-term profits that are through the roof when they launch a new gadget. The higher prices can be justified given the trailblazing approach to technological innovation at the given time.

Price skimming can also create an element of prestige surrounding your product or service; it creates the impression your offering is a must-have. Introducing high prices in the early stages attracts customers who are status-conscious, and provides you with a much-needed buffer when it comes to reducing the price in the future, if needs be, when rivals enter the market.

Price skimming disadvantages

It could be suggested if you were to introduce a low price, to begin with, then this would heighten the sensitivity surrounding price amongst your target market, in which case, it’d be difficult to increase rates in the future, without jeopardizing your relationship with your customers.

Target costing

Target costing is defined by the Chartered Institute of Management Accountants as: “A product cost estimate derived from a competitive market price”.

Target costing is categorized as a management technique, as well as a pricing method, in which price points are influenced by the condition of the market, and other key factors, such as:

  • Homogeneous products
  • Volume of competition
  • No/low switching costs for the end customer

How to price your product using target costing

Imagine you have a business selling customized soccer jerseys, and the average market price is $200. Here’s how to calculate your target cost:

Average market price: $200
Target margin: 50%
Target cost: $100

Because your target margin is 50%, the maximum amount you can use to produce each product is $100. If it costs more than $100 to manufacture each customized soccer jersey, this will reduce your margin. So, how do you determine the appropriate margin?

There's no quick-fix to determine an appropriate margin for your product but the standard margin is 40-50%. Alternatively, you can use the price multiplier method to calculate your margin:Simply multiply the total costs by 2 (100% markup or 50% margin) or by 3 (200% markup or 67% margin). This will help you establish a suitable mark-up to put on your product.If your product is unique, you’ll be able to charge a higher margin.

Pricing strategy advice

There are many stages involved from the inception of an idea to a product launch, and pricing can dictate the success of your product.

Ashley Murphy, Toast's Senior Director of Market Insights and Pricing, shared her specialist insights, including her preferred pricing strategy, and the role of product marketing in the pricing process.

Pricing and packaging [Q&A with Toast]
Ashley Murphy, Toast’s Director of Market Insights and Pricing, shared her specialist insights, including her preferred pricing strategy, the role of product marketing in the pricing process, top tips, and much more.

Axel Kirstetter, VP of Product Marketing and Sales Enablement at EIS Ltd gave a presentation on how product marketers can get a seat at the pricing table.

How product marketers can get a seat at the pricing table
Here I’ll explain how as a PMM you can get yourself a seat at the pricing table through the areas you can influence in your organization and a series of steps to success.

Important pricing formulas

How to calculate a product selling price

A suitable product selling price is key to your success. If you’re underpriced, not only will you lose money, but your product could also be viewed as cheap and unreliable.

On the other hand, overpricing your product means you run the risk of pricing yourself out of the market.

You need to introduce a price point that’ll secure your place in the market, satisfy your customer, and give your business scope to thrive and develop.

How to calculate the product selling price

To calculate your product selling price, use the formula:

Selling price = cost price + profit margin

The cost price is the price a retailer paid for the product, while the profit margin is a percentage of the cost price.

How to calculate the average selling price

Before calculating your selling price, it’s important to understand the average selling price of existing products already available in the market.

The average selling price can be calculated using the formula:

Average selling price = total revenue earned by a product ÷ number of products sold

If your company is in the process of releasing a new games console and wants to position it as a high-end product, the average selling price of $500 of existing games consoles can be used to guide your pricing strategy.

You may price yourself at $550-$600, to stand out as a luxury (albeit more expensive) alternative.

How to calculate product selling price by unit

If your business stocks up on inventory in bulk, it may be worth calculating your product selling price by unit.

To calculate your product selling price by unit, follow these three steps:

  1. Calculate the total cost of all units purchased.
  2. Divide the total cost by the total number of units purchased - this will provide you with the cost price.
  3. Use the selling price formula to calculate the final selling price.

How to increase your product price

There are also instances when you may need to increase your prices, and this can prove a challenge in itself.

Phill Agnew, Senior Product Marketing Manager at Hotjar outlined two tactics you can use in his article, The Psychology of Pricing: 5 Pricing Principles: hyperbolic pricing, and the decoy effect.

The psychology behind pricing: 5 pricing principles
My name’s Phill Agnew and I’m going to talk about the psychology behind pricing. I’m going to walk you through five pricing principles and focus on two specific tactics that the majority of SaaS brands use, I’ll explain the science behind those.

Charley Gale, Copywriter here at Product Marketing Alliance, covered some important topics around prestige product pricing to help you gain a better understanding of the strategy in this article:

What is prestige product pricing?
This article explores topics around prestige product pricing including what it is, why it’s important for PMMs, and how to use it successfully.

What to consider when discounting a product

Discounting is a tried and tested tactic used by companies worldwide to drive sales; research has revealed discounting is the top pricing strategy for retailers across all sectors.

While discounting your product can increase your customer base and generate additional income, it can sometimes prove counterproductive.

Although reduced pricing can attract more customers, this strategy can also reduce your profit margins or attract negative personas when it isn’t planned properly.

Before applying any discount to your pricing strategy, be sure to plan meticulously and consider the following:

  • Define your objectives
  • Segment your personas and offers
  • Get your timing right
  • Consider your margins
  • Identify upsell and cross-sell opportunities
  • Prioritize your new products
How to price a product and introduce discounts
Pricing is crucial to the success of any product. Here, we explain each strategy, how to calculate your selling price, and how to introduce discounts.

What to consider when pricing a product

Silvia Kiely Frucci, Senior Product Marketing Manager at Castor, shared five pricing lessons from her career so far:

  1. Follow the process, but don’t be bound to it.
  2. Pricing is a team effort.
  3. The perfect pricing structure is a myth.
  4. Negative price testing is the best ground to re-evaluate your product value proposition.
  5. Pricing is not just a number.

Check out each principle in further detail. 👇

5 lessons I have learned when pricing
Good pricing leads to a healthy business: increased profits and sales, and (arguably) most importantly, generate engagement within the organization and with the customers.

How to generate profit

Companies have one thing in common: they all want to make a profit. There’s no doubt a suitable product selling price plays a crucial role in helping them achieve these objectives. After all, a new customer might see your price compared to competitors on the market and decide to remain a customer, improving your retention rates and, when they continue to return to your business, your overall sales.

In his presentation, How to Price for Growth and Profitability, Yannick Kpodar, Global Director of Product Marketing at PayFit, outlined his step-by-step process to identify the best pricing strategy for company growth and profitability.

How to price for growth and profitability
Yannick Kpodar has just recently moved from Silicon Valley to Paris and found my new home at Payfit as the Global Director of Product Marketing. Previously, Yannick drove global enterprise growth at LinkedIn Talent Solutions in the San Francisco headquarters

Access this complete toolkit - and more - right here. 👇

Product marketing toolkits | Product Marketing Alliance
Everything you need to gear up for your next big project.