Pricing Optimization


Pricing Optimization

The Goldilocks pricing is the one that is the perfect balance of profit, value, and desire - like the temperate of porridge in the fair-tale.

Since you can’t control which products and features customers want, and adding valuable product features takes time and effort, most companies start finding that balance by setting two things: the starting price of their product or services, and any discounts or promotions they might offer.

Your starting price, or base price, is important since it lets customers know whether your product or service is worth their time and investment. Starting prices should be optimized to match the baseline demand for your product before any discounts or promotions are applied. Optimizing the starting price works well for companies with products and services that remain fairly stable over time, like groceries, office supplies, or even SaaS products.

If you’re in sales, you need to know what works best to pull in new customers. Offering your product at a discount — or, in some cases, even offering a freemium version — is a great way to bring in new customers (generally customers acquired through freemium offerings cost nearly half as much to acquire as those who sign up for paid offerings directly).

Then there are promotional offers.  Which would serve you and your customers best? Will markdowns create any additional profit, or are you better off charging the starting price? How big of a discount should you offer below your starting prices? How long will something take to sell at a specific price point? Optimizing your promotional prices can help boost sales for newly introduced products and promotional bundles—for example, a SaaS company launching a new product, or bundling multiple products.

Ultimately all this needs offsetting against your LTV vs CAC ratio.  Easy to say in theory, but hard to do in practice – especially in a rapidly changing nascent marketplace.   Most businesses don’t have the resources to optimize their pricing decisions initially, which is perfectly fine.  However as you scale, getting pricing right can be one of the easiest routes to 5-10% more revenue.   It’s not easy though and requires investment so instead of coming up with a bullet-proof price optimization strategy, companies turn to strategies like guessing, relying on discounts, and not pricing based on value.

Guessing and iterating rather than using analytics and metrics that customers have given you is never optimal and almost certainly leaves money on the table.  Similarly not getting the right pricing tiering right (e.g. number or spacing) is another area to be optimized.  Data shows that too many or too few options pushes away potential customers, with a clear decrease in conversion rates as the number of tiers gets higher.

Another area that often needs addressing as companies scale is discounting.  Initially most businesses wield discounting like a sledgehammer to get any and all customers through the door.  You have to show usage and product-market-fit, so discount the price and show “adoption”.  Great our acquisition metrics are suitably juiced in the short term.  The challenge is as the company grows profit not revenue becomes the focus and so discounting needs to become more of a scalpel.  Just using discounting bluntly drives a lower quality of customer as they have been trained to devalue the product and so typically have a churn rate of double that of full price equivalent customers.

In summary the right pricing can make or break a scaling business. Copying your competitors might mean starting a price war, but making a guess could leave you balking at abysmal sales numbers. Often bring on an experienced FD is critical here to counterbalance the commercial teams pure top-line focus.  With them focused on successful price optimization it is just a matter of finding the sweet spot between valuable and lucrative — a balance that can have a major impact on your sales, customer satisfaction, profits, and achievable growth goals.

That said, price optimization isn't simple. It requires research to understand both your customers and your business. And while it's not always straightforward, figuring out the best price for your product or service is far from impossible — especially when you have the right tools and a strong understanding of basic pricing concepts.

It’s just like how I make my porridge in the morning — trial and error doesn’t cut it.  It takes time and skill to make it just right.  Not too hot.  Not too cold.  And then everyone is happy.

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