Product pricing and gravity

When you first release your product to the market, it is extremely important to think long and hard about product pricing. I can’t tell you how many meetings I have had where I have thought that companies were giving too much away for too cheap a price. Or they have given their product or service away for free which can be a great model but they had no plan to monetize in the future. When asked about pricing, I have at times heard a “we want to release it to the market and see what happens.” That can and does work great for testing a product and its features and building a user base, but when you do this, I would also hope that you have a plan for how you will monetize in the future. The allure of undercutting your competition and driving volume is a strong one, but one that can also be quite dangerous to your business. One rule that I have always believed in is that gravity takes over in product pricing. In other words, it is much harder to increase pricing (defy gravity) then it is to reduce the price of your product. The corollary is that it is much easier to reduce pricing then to increase it as customers feel like they are getting a good deal. Over the last twenty years, it is clear that technology buyers expect to get more for the same $ spent last year or to get the same product for less $ this year. This is applicable to consumer as well as enterprise-focused companies.

While I am no means an expert in product pricing, it is important to first analyze the competitive landscape, how your product fits in versus the competition, and then to figure out where you want to play in this market given your strengths and weaknesses. If there are no direct competitors, then look at some potential substitute products that customers are buying and figure out how your pricing looks relative to those companies. Once you get an understanding of the market dynamics, you should figure out how you want to enter the market vis a vis your pricing – do you have the most-feature rich set of services and want to charge the most or charge a similar price for more functionality or do you want to be the high volume-low cost provider. Finally, I would think about your product roadmap and determine if you can get to market aggressively, be different from your competition, and build a model around upselling new features and functionality. More often than not, I see companies not doing enough thinking on product pricing with the idea that they can always change it later on. In addition, many companies seem to err on the side of charging too little, rather than charging a little more with the opportunity to discount and drop or refine pricing down the line if sales do not ramp up as anticipated.

So when you release your product, remember that the laws of gravity take over in product pricing. If you are going to give a product away for free, have a plan to upsell or make money down the line with premium services or other functionality. Also remember that once a customer starts using a product or service that the last thing you ever want to do is take value away from your customer by increasing the price or beginning to charge for a service without adding new features and functionality. How you price your product at market release is not easy to undo in the future.

Published by Ed Sim

founder boldstart ventures, over 20 years experience seeding and leading first rounds in enterprise startups, @boldstartvc, Saas 2.0, googlization of IT, security, smart data; cherish family time + enjoy lacrosse + hockey

3 comments on “Product pricing and gravity”

  1. I’ve engaged with some potential customers now that I’m advising a software company and they are very focused at first on what unique value you are providing rather than price. Once convinced they don’t flinch at a six figure price but at the same time make it clear that the company should expect to be beaten down on price multiple times before the sale is done.

    All the more reason to have discipline around price at the beginning. The costs of doing business with enterprise customers remains high besides!

  2. Kris-so true-especially in the enterprise world. Also, if you price too low to start with it is harder to give discounts to reseller partners and possible OEM relationships

  3. I definitely think you want to follow a top down approach and bottom up one. By top down I mean the normal “what will the market bear”. This is the domain of marketing.

    Product development should also analyse the bottom up cost of the product. In my experience the soft costs i.e support/sales, are the ones that can catch you out. And yes you often have to model aka guess some of them.

    How often do people _really_ understand their product margins … and how often do they suffer because of this.

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