Establishing pricing for your product business can feel like a real guessing game, but it shouldn’t be that way. Most product companies do not go about pricing their products the right way.
In the process of selling your product have you ever experienced any of the following?
- Customer’s balk at your price of your product when it’s mentioned
- The feedback you get from them, is that your product is too expensive
- Customer’s often don’t have the ‘budget’ available to justify purchasing your product
If so, you’re not alone. This happens to everyone building a product business.
As I mentioned earlier, most product businesses go about pricing their product incorrectly. Product companies often push customers to purchase their products without providing enough context around the problem their product solves. This leads to customer thinking that is all wrong about what it means to buy your product.
If your customer is interested in the concept of your product, but doesn’t understand the monetary impact of using your product, then you are doing them a disservice.
The more clearly you understand your customer’s problem, the more exactly you can justify your pricing. Whenever possible, your product needs to be seen as a solution that is an investment and not an expense.
So how do you go about preparing your customer to be in the right mindset when considering purchasing your product?
Find the expensive problem
You’ve got to know everything about your customer’s problem to build a successful product business. If you don’t, then you won’t be properly prepared for this pricing exercise. If you are unsure if you’ve found the right problem worth solving then you need more data and this can only come from customers.
You’ll know when you have found the expensive problem of your customers. It will be top of mind for them and they will do anything to solve it. They will also be vocal about needing a solution for this problem. If you don’t get a reaction like this when talking about the problem with your customer, then you are focusing on the wrong problem.
Walk the pricing calculation with your customer
Almost anything can be quantified. What matters most is if you’ve done the calculation the right way and if the customer understands and agrees.
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You need to measure the impact of the expensive problem in terms of dollars and cents. Does this problem cause your customer to lose five hours of time per week? Does it require them to pay unnecessary and expensive bills? What is the financial impact of this problem?
If the problem causes your customer to lose five hours of productivity a week, then put that in terms of a dollar figure. If we assume a conservative cost of $50/hr for their time and multiply that by 5 hours, we get $250 per week. This problem is costing them $250 per week.
Make sure you put this expense in terms that they can use to compare it to the cost of investing in your product. In this case, $250 a week would cost your customer $1,000 a month.
Walk this calculation in real-time with your customer and get their reaction. Do they agree? Why or why not? You’ve built the foundation for them with this example, but let them build the rest of the house. Allow them to correct your calculation or math wherever they feel it isn’t quite right. Work with the number they give you.
Take a conservative portion of the savings
If the problem costs your customer $1,000 a month and they agree that this number is a fair estimate, then your job is to participate in the savings by helping them solve this problem. How exactly do we do this? A great pattern in product success is being able to justify a 10X multiplier benefit to the customer. In this case, you’d take 10% of the cost savings for access to your product and give the remainder of the savings back to them. In our example, your product would be priced at $100 per month.
By building and walking a pricing example like this with your customer, you’ve enabled them to see your product from a different perspective. They will no longer be thinking of access to your product as an expense, but rather an investment in tremendous savings for them.