How to set your pricing strategy

Written by Jon Paget.

As part of our monthly webinar series (subscribe in the footer to hear about future webinars), we spoke to JT Bowlin about pricing strategy. JT has spent his entire career focused on pricing and was the perfect person to talk about this topic – a subject that often comes up when we’re talking to clients.

As with all our webinars, we focused on just a handful of questions in the half an hour:

• Who owns (or should) own pricing?

• What factors should be considered as part of the conversation around pricing?

• What specific considerations should be taken for setting a pricing strategy for a brand-new product or service?

• How do you know you’ve got the right pricing strategy?

Webinar recording

Short on time? Here are the key takeaways

Who owns (or should) own pricing?

Bethan / Jon’s thoughts:

Unsurprisingly, we both feel marketing should own pricing. It’s a fundamental part of the marketing mix and pricing really can and does affect the positioning of a brand. Marketing is best placed to understand the value that a product or service likely offers (vs. finance who will be cost focused and sales who will be sales focused). It’s important that all core functions of a business have a voice in the pricing conversation though, and sales may need (agreed) pricing discretion.

JT’s thoughts:

Ideally pricing should sit directly under the CEO or COO, if not here, then in marketing.

What factors should be considered as part of the conversation around pricing?

JT’s thoughts:

You do not set pricing in isolation. Imagine if we were McDonalds. If we were looking to launch a new burger, we’d need to consider where it would sit among the other food items and other burgers in our portfolio. The same is true of the other burgers available elsewhere from competitors.

Then there are company goals and potential political influences that affect the price we set.

The most important thing is to identify perceived value. And the only way to do this is to talk to your potential customers or prospects. There are a lot of things that fall into this conversation about perceived value.

Jon’s thoughts:

How you price your product / service says something about its quality (using a basic 2 axis competitor positioning map is useful here). This extends to putting pricing up or down – for instance price discounting can have a much longer lasting (negative) impact on your future demand (and the price you can charge) than just the period over which you’re running the discount.

What specific considerations should be taken for setting a pricing strategy for a brand-new product or service?

JT’s thoughts:

When launching a new product, it’s important to bring pricing in at the start. This helps to work out if there’s a place in the market for this product / service to sit and what the ballpark might be. This allows you to scope the range of product features that are needed or the need to test the value of features.

Bethan’s thoughts:

ChatGPT is a good example. The price point of the pro version had a lot of discussion – trying to work out what the price should be. It was clear they were scrambling to assign a price and monetise something that hadn’t had a whole lot of consideration beforehand. The perceived value changes depending on the customer cohort; different groups of people will perceive very different value from your product. That’s why SaaS products often have different tiers of pricing / plans.

How do you know you’ve got the right pricing strategy?

Bethan’s thoughts:

It’s important to understand how your pricing strategy affects the overall health of the business. You need to be really clear on the margin you need to be successful. And do you understand the margin generated from all your different products/services and how this contributes to the overall revenue of your business.

JT’s thoughts:

There are so many factors – what affected price yesterday might not be the same drivers of price today or tomorrow. If you really understand value, and price relative to that value, then things should work. For instance, if the price of a competitor’s product goes down, it’s likely the perceived value of your product will drop. This is a dangerous place to be as it can commoditise the market and eliminate margin – but it does happen. Many businesses may need to react to this, although differentiation (of your brand) helps you protect a given (possibly premium) price point.

Jon’s thoughts:

Understanding price elasticity of demand – how elastic your demand is relative to changes in price – is important to help answer this. If there’s a lot of possible substitutes for your product or service, any increase in your price will likely result in a drop in your demand, unless you’ve achieved some differentiation via your brand, as JT points out. Equally, if there aren’t many substitutes or you have a highly differentiated product / service, demand is likely to be less sensitive to price increases.

Questions we were asked during the webinar

We didn’t have time to respond to these during the webinar so we asked JT to give his thoughts on the questions our audience asked…

1) Do you ever do A/B testing of pricing or do you think you have to set the pricing strategy then just launch it?

This varies depending on your business.  Sometimes A/B price testing is viewed as illegal, or at least unethical.  That is more of an issue in B2C than B2B though.  Amazon got in trouble with this in the past.  If there is zero risk of your customers finding out and protesting, then I think testing could work well.  It’s easier to A/B test when pricing is not public and you have customers that don’t really talk to each other about pricing.  Or, if pricing is bespoke or dynamic, so everyone expects a slightly different price anyway (think hotels/flights).  If you are not able to test for the reasons above, then you can still optimize your price over time by tweaking it and measuring elasticity.  Be careful not to use promotions as A/B test, or at least treat the data with a grain of salt.  Promotions themselves have a psychological impact, which can mislead you if demand is simply higher due to that.

2) In terms of only increasing prices when adding value – is the competitive landscape more relevant than any other factor?

E.g. If everyone is raising prices c. 15% in the mobile phone sector, then there’s no need to add value to keep the customer.

This depends on how important the product is to the market.  If you take something we all generally want, that has minimal differentiation, like electricity, and all other suppliers raise prices, then yes, you have leeway to increase price to the same level, or a bit lower if you are trying to gain market share.  However, there are max prices for products and services, which is referred to as willingness to pay (WTP).  For electricity, while customers may have to accept the price increase, they may decrease their usage to off-set this in full or partially.  For your example of mobile phones, if the market raises prices across the board, what could happen is that people simply buy phones less often to off-set this extra cost.  Yet, all of this still relates to value.  If the price increase creates a higher price than what your customers value your product at, there will be less demand, which could result in worse commercials, unless you have a monopoly on a must-have product.

3) How does the panel feel about creating free-to-use services as a hook into customers using full services later?

I’m personally a fan of freemium models, but this is not black and white.  It really depends on variables like if you can eat the cost of doing it, what your upsell conversion rate is, etc.  The key is to set the level of value where it is enough to get people in the door, but where the upgrades are very compelling (especially the first paid level).  For example, lets say you sell APIs.  You might allow a fixed number of API transfers on a max number of data fields.  This lets your prospects try out your service, but if they were serious then they’d need to upgrade.  This topic goes much deeper though, like if you are in a two-sided market.  For example, if you are eBay, it may make sense to let consumers sell for free, as that also means they will likely be buyers on the platform, which creates a larger market, so you can charge your business customers more.

4) Is it easier to price high and pull back if you don’t generate volume, vs set out with a low price and increase once you have secured scale?

It is generally easier to start high and come down.  Depending on your product, this could be the standard model to maximize commercial impact.  For example, for tech products, many times you have early adopters that are willing to pay a premium.  You can launch it at a price suitable to them and then lower it over time to capture additional market share.  Think of gaming consoles, phones, etc.  Now if you are considering starting with a low price to penetrate the market and then raising the price later, this is easier to do on products that are purchased infrequently, as the customer may not recall what they paid before.  The other thing you can do in this instance is time-box an offer.  Something like an early-bird promotion.  This gives you permission to increase the price at a later date if you so choose.

Some final thought that also came up…Thoughts on increasing pricing during inflation

JT’s thoughts:

No one likes prices going up. And just because inflation has gone up 15%, customers won’t like their prices going up 15% because there is’t 15% more value. If you’re going to put prices up, always try to offer some value add at the same time so your price jump isn’t just about inflation.

PESTLE is a really useful tool – not just for assessing pricing in difficult economic times but also if you’re looking into new markets.

If there’s real pressure to increase pricing, I’d recommend doing a pilot first and test the results.