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Why Successful Companies Determine the Pricing Strategy Before Building the Product

By June 10, 2021September 2nd, 2021Featured, Pricing, Pricing Strategy

Strategic pricing is a multi-disciplinary effort that helps companies create differentiated offers that customers are excited to pay for. Unfortunately, several things get in the way of leaders’ ability to manage this delicate relationship between price and value as they approach that key event: Product Launch. Luckily these pricing strategy problems are avoidable. I’ll dive into some of these common mistakes to ensure your new product reaches stratospheric heights.

Sweaty Palms on the Launchpad

Imagine your high-volume B2B SaaS company is building a new product that will dominate the market. You’re convinced it will create tremendous value for your customers. Launch day is approaching, and the feedback from your Beta customers has been great. Just one small problem: The team has been so focused on creating fantastic value for your customers with the new product you’re developing that no one has figured out how much customers will pay for it.

Like most high-growth companies, your team has been running at full speed towards launch. For months now, the executive team has been staring at a “placeholder price” on your product update slides. This price will be validated “later.” However, between now and launch day, the team’s capacity is full. Every week that “placeholder” price doesn’t seem to get any closer to a level of market validation that would calm your nerves. When you have tried to move pricing conversations forward, the strong opinions on the topic have created uncomfortable tension. All these factors have led to this critical item lingering without solid data or rationale.

Calling Mission Control. We Have a Problem.

You think of having the Product or Marketing team ask the Beta cohort what they think would be a “fair price,” but that doesn’t quite feel right. First, they are customers of your existing products and, for better or worse, are anchored to your current product pricing. That may be somewhat directionally helpful as you plan to sell your new product to your existing customer base. However, it still leaves you guessing about the perceptions of new market participants you’re hoping to attract with this new offering. Second, it’s not clear how you will get unbiased feedback on something as sensitive as price. Won’t folks low-ball a price, thinking they are participating in an early negotiation? What is a CEO to do?

This situation is all too common, but the good news is that it doesn’t need to be, and the better news is that this isn’t your fault. Unfortunately, several common pitfalls lead companies down this path, and hopefully, with some forethought, you can avoid these traps with a little careful planning.

Pricing Myths Contributing to a Failure to Launch

Take solace in the fact that companies at your stage virtually never have pricing specialists on staff. It’s just not a core skill set that most companies need before reaching several hundred million in ARR. Before then, Product Marketing (which typically owns pricing in large enterprises) is often not an established function. Even if it exists, it’s a role that is usually geared more towards messaging and demand generation experts at early-stage companies vs. the pricing expertise you need for a situation like this.

Although the folks on your team are smart enough to figure your pricing strategy out if they had the time, that is precisely the problem: No one on the team has time to do the work. Moreover, with the level of market research needed for such a critical decision, it’s challenging to get an informed answer just by having one of your executives “carve out an afternoon” to dig into it.

Persistent Myths About Pricing Strategy

There are two different but highly related pricing myths that have shaped your thinking without you even realizing it.

  • Myth #1 – Customers have to experience a product before saying what they’d pay for it.
  • Myth #2 – A team cannot assess what their new product is worth before knowing exactly what they are building.

Let’s give some credit to these myths. They sound plausible on the surface, and, like all myths, they contain elements of truth. However, they are not entirely true, and blindly believing in them can lead your team astray.

Deconstructing Pricing Myth #1

Yes, customers will get a better and better sense of value as they experience your product. Customers are not omniscient market participants (i.e., homo economicus), and they will understand value better at progressive levels of experience with your product. Of course, customers will have better ideas of what your product does and the value it provides after:

  1. Reviewing a landing page for the product
  2. Attending a one-hour demo or phone call with your sales team
  3. Using the product in a 30-day trial
  4. Being a customer for a year

But if all you have is a landing page, for example, you can still get a good sense of what the product is worth. The critical thing that the Jobs-to-be-Done theory teaches us is that customers are experts in their problem, but not your solution. They will not be able to articulate it in a spreadsheet (that’s your job). Still, they understand the cost (both functional and emotional) of the suboptimal solutions they are currently using to solve their Job-to-be-Done.

Deconstructing Pricing Myth #2

Often, Product teams continue to iterate on product features, and user flows up until the last sprint before launch. However, similar to the above, if the Product team has done the work at the outset understanding the customer’s Jobs-to-be-Done, finalized user flows are unnecessary to get value and willingness to pay estimates.

Finally, understand that the pricing strategy exercise is not about finding the perfect answer. It’s about the balance between minimizing risk and maximizing return. As a leader, you will always make decisions based on imperfect information, so perfect information is not the bar you’re looking to achieve. Better information is.

A Pricing Strategy for a Successful Launch

So what does this mean for you and your business? The good news is that you can avoid the traps above with a little dose of proper planning and three easy steps:

  1. Familiarize yourself with the proven methods to approach this research (continue to check back here for more in that space). 
  2. Set aside time early in the development process to do this research. The earlier you can get ahead of it, the more you’ll know how to steer future product development investment. In addition, you can get surprisingly good information much earlier in the development process than you may have thought before.
  3. Set aside time for continuous pricing research during and even after development. Pricing is rarely a “one-and-done” exercise. The best companies modify their pricing and packaging on an ongoing basis. After all, your product is constantly improving, and the market is continually evolving. Planning for this continuous evolution will lead to a much more profitable future!

Accelerating Off the Launchpad

The right pricing strategy will increase your new product’s likelihood of success as well as your company’s revenue growth, customer lifetime value, and net dollar retention. A clear pricing strategy will minimize the risk of leaving serious money on the table with your incredible innovation. Your customers also benefit, as a well-researched pricing strategy will fully align the value your customer receives with the price that they pay.

Investing in pricing research upfront allows you to determine the expected return on investment today. This allows for a more explicit allocation of continued R&D investment and financial plan forecasting (which your investors will appreciate). Finally, working with an external partner has two benefits. They can augment the team’s capacity during crunch time. And, they can also help avoid some of the political minefields that pricing conversations may have uncovered in the past.