There is no magic formula for pricing a product. You can make a start by getting answers to these queries:
- Can you estimate the value to customer in terms of increased revenue or cost savings?
- How does your competition price their product?
- Should your product be priced higher/lower based on more/less capabilities?
- What is your total investment and annual expense (development, support, sales and overheads) in building the product? How many copies do you expect to sell in next 2 years?
The biggest mistake companies make is to fix the price based on their costs. The primary reason to be in product space is to generate non-linear revenue based on value being delivered.
Based on competitive pricing and your own value proposition, you can have a pricing band as a starting point. The next decision is whether to be a high volume/low price player or a premium provider. You can then set a tentative ‘list’ price.
Test this pricing with early customers. Be consistent with the quoted list price, but offer variable discounts based on what it takes to win early deals.
When you start selling, you will be eager to win deals, and may compromise heavily on rates. This is natural. Win those early birds with steep discounts, but try and select the right ones first.
Ideal first clients (‘anchors’) are strategically important for their brand value or volume of business. Signing up a well-known company becomes a great validation of the product. Pricing should not stand in the way of closing such deals.
In some accounts, the person you are dealing with will have a certain spending limit. If possible, structure the offering to be within this limit and avoid another level of approval. Occasionally, the customer will tell you at what price they will buy. If it fits into your discount structure, and the business is important at that time, go ahead.
Payment terms may consist of some advance and rest against deliverables such as installation, customization, deployment and acceptance. Actual payments at each stage can vary from immediate to 45-60 days from date of invoice. Cash flow is an important consideration, so maximize initial payments and minimize invoice to payment time. When finalizing a deal, offer to trade more discount in return for a bigger advance.
If you have a mix of licensing options (permanent, subscription, lite/standard/premium, usage based etc.), it can enable you to offer a broad range of pricing options. This can be useful at times, but can also cause the customer to get more confused. Experiment with two or three choices and assess what is working.
Stabilizing the price
Once you have gained some confidence with customers signing up and revenue coming in, then it is time to adopt a more business-like approach.
If you are getting clients easily, without significant discounting, then your product is probably priced too low. Conversely, if most prospects are not signing up, look for root cause. It may not be the cost – the problem may be in the product, how you sell, or which customers you are pitching to.
Test the elasticity of your pricing with higher rates for the next few prospects. Deals may be delayed or lost at higher price, but fewer deals may still bring in greater revenue. For example, at twice the price, you need half the deals to earn same revenue. Higher rates can delay decision making, while low price means you have to be targeting more prospects.
Theoretically, if you plot quarterly revenues against unit price, it should result in a bell curve. Revenues will first rise with incrementally higher revenue per sale, but will peak at a certain price beyond which it is considered too high by the market. In practice, there are too many variables for such an exercise to be worthwhile.
Instead, experience will tell you what is working. The right selling price is the one when you are winning most customers with low to moderate discounts, and losing only a few. Hopefully, at this price, you are making a reasonable profit too.
With increasing confidence and maturity, you will learn to be patient when negotiating deals. Do not concede on rates quickly. If your product is good, clients will pay. Learn to walk away from a deal if the price is too low.
As your client base increases, the list price, discounts and payment terms will begin to stabilize. However, business is always in flux. Keep tracking factors that influence rates: competition, more value from new releases, cost increases, profitability, deal loss rate, new pricing models etc., and always strive to maximize revenue.