Product Pricing Strategies
Scrum Teams are accountable for delivering valuable products that meet their customers' needs. How a product is marketed, priced and positioned is intrinsically linked to the overall customer experience as well as an organization’s product and market strategy.
Aligning on pricing strategy is an aspect of product management, and is a context-driven activity depending on how an organization forms their pricing.
The Product Owner is one of the key players involved in defining the product pricing strategy. Just like with the other aspects within product management, pricing should be a collaborative effort and will require participation from stakeholders such as marketing, sales and finance to explore questions such as:
- What are your target customers prepared to pay in this market, given their perceived value of the product and the availability of competing products?
- Where is your product in its lifecycle? What percent of the market do you have? How much of the market do you aim to have?
- How do your competitors position their products?
- What margins and revenues does your company need/ expect?
- How do you want to position your product? What you charge our customers sets their expectations about the quality of our product.
- How does our pricing strategy align with your goals? (e.g. When your goal is to maximize revenue your pricing strategy might be different than if your goal were to penetrate a new market with your product.)
These previous questions consider some of many factors on what pricing strategy to apply.
Common Pricing Strategies
The following are common pricing strategies. A company might choose to use a combination of pricing strategies. Regardless of which ones they use, pricing should be inspected regularly and adapted when needed, so be sure to revisit the precending questions and your approach regularly.
Value-based Pricing
Value-based pricing is when a company prices their product based on what customers are prepared to pay, given their perceived value of the product. The strategy is used when the purchasing decision is emotionally-driven or when scarcity or the perception of scarcity is involved. Value-based pricing typically prices items and services at a higher level by increasing the perceived value of the good or service.
Penetration Pricing
This pricing strategy is often used by startups, when they enter a new market with a new product. The initial price setting is low to attract customers and users and usually when the company and or product is more established prices increase gradually.
Competitive Pricing
Competitive pricing sets pricing based on what your competitor charges for comparable products. This is typically used for ‘bargain’ products that do not have a unique selling point. If you can offer something better with your product than your competitors then setting your prices competitively might not be needed.
Cost-plus Pricing
This pricing is based on the product cost (all the costs involved in bringing the product to market) plus a desired profit margin. Though focused on costs and profit margins, a cost-plus price will still need to fit in what customers are willing to pay (willing to pay range). If not, the company will need to find ways to lower the costs or adjust their margin so it will fit within the range. Typical examples of industries that use cost plus pricing as a pricing strategy might include manufacturing, construction and consulting.
Economy Pricing
Economy pricing might be mistaken for competitive pricing as this strategy involves setting the lowest prices among competitors. However the difference is that economy pricing specifically targets customers who are price sensitive and willing to sacrifice quality for a lower price. Companies using economy pricing aim to turn over a high volume of sales while being cost efficient. Typical examples of economy pricing are at low budget clothing stores or budget airlines.
Dynamic Pricing
Dynamic pricing is flexible pricing based on market demand. Nowadays, dynamic pricing typically uses an algorithm that automatically adjusts the pricing based on the demand. The higher the demand, the higher the price. Dynamic pricing is often seen when booking flights or hotels.
Price Skimming
This pricing strategy is the opposite of penetration pricing. When using price skimming companies start with their highest price and lower it gradually over time. Companies target the so-called early adopters, those buyers who for example want to be the first to have the latest model of a product and are willing to pay over the top for it. Over time prices lower to attract the more price conscious customer.
Freemium Pricing
This pricing strategy involves offering a free basic version to customers that allows them to get a taste of the product. For an enhanced experience, customers have to upgrade and pay. This strategy helps to initially attract a large user base and convert those that want more advanced capabilities into paying customers. Freemium pricing is used for example in digital products where customers can choose between free and paying subscription models.
Premium Pricing
Premium pricing is how a company positions their product and sets customer expectations. With premium pricing a company sets its product(s) at a high price to create an image of superior quality, exclusivity and prestige. It is also known as prestige pricing or luxury pricing and is used by luxury brands.
Conclusion
Aligning on a pricing strategy is an important aspect of managing a product where the Product Owner should be one of the key players involved in setting this strategy together with other stakeholders. Selecting a certain pricing strategy at any given time depends on a company's objectives and the specific context of the product. Different goals and market conditions require different approaches to pricing, making it essential to align the strategy with both the broader business goals and the market environment.
Resources: