PRICING

STRATERGY
WORKSHEET

[YOUR COMPANY NAME]

Date:
Purpose

The purpose of this tool is to help you understand the considerations for establishing a price for a
product. The determination of product pricing is the responsibility of the Product Manager, but many
departments in a firm will want to influence this process, particularly Sales and Finance.

Pricing is a numerical form of product positioning. The way a product’s price is set determines:

 Who will buy your product?

 Which competitors you will encounter

 How, or if, negotiations will occur

 How customers will perceive your product’s capabilities and quality

The Pricing Pyramid

Here is a brief explanation of the layers in the pricing pyramid:

 Pricing Objective: The philosophy under which you define a strategy, build a pricing model
and set prices.

 Pricing Strategy: Influenced by your pricing objective, the plan for determining the optimal
pricing model and price.

 Pricing Model: The implementation of your pricing strategy.

 Price: The amount paid by a buyer to purchase your product.

The top of the pricing pyramid begins with setting an objective that defines what your pricing will
accomplish. Many possible objectives exist, and some are on conflict with each other. Here are some
common pricing objectives:

 Maximize profitability

 Maximize revenue

 Maximize market share

 Reinforce brand perception

 Stabilize the market

 Achieve Return-on-investment

 Become the price leader

 Create product interest

 Discourage entry of new competitors into your market

Ideally, choose one primary pricing objective.

Choosing a Pricing Strategy

The next level of the pricing pyramid is to define a strategy for achieving your pricing objective. While
there are many strategies for pricing products, some common approaches are discussed below.
  Cost Plus: Setting price based on your understanding of measurable costs, plus percentage
uplift.

 Competition-based: Setting price based on what your competitors are charging.

 Value-based: Setting price in relation to the value your product delivers.

Of these three approaches, value-based pricing is usually held in the highest esteem, but quantifying
value is sometimes difficult and it requires constant monitoring. An advantage of this approach is it
creates beneficial pressure to keep the product’s value proposition high.

Another pricing strategy is to set price based using a Price and Quality/Differentiation matrix:

Quality/Differentiation

Low High

Low Economy Penetration

Here is detail for each of the boxes referenced in the matrix above:
  Economy: Low frills pricing enabled by keeping marketing and production costs to a bare
minimum. Economy pricing is appropriate when a product is a “Cash Cow” and marketing for
the product category done by competitors provides adequate awareness.

 Penetration: Initially setting prices artificially low to gain market share, then increasing price
once share targets are achieved. Penetration pricing is appropriate when the threat of
competition is imminent and the opportunity to lower production costs comes as a result of
volume sales. This strategy’s appeal increases as the market potential grows.

 Skimming: Setting a high price initially because of a market of product advantage while
recognizing that the advantage is not sustainable. As competitors respond and supply of
competing alternatives increases, prices must come down to remain competitive. Skimming is
appropriate for pulling profits from market segments that are not sensitive to price.

 Premium: Setting prices high because of significant product differentiation or brand perception.
Premium pricing is appropriate when substantial and sustainable competitive advantages exist.

Selecting a Pricing Model

With a pricing objective set and strategy chosen, you will now select a system for pricing your product
or product family. As you do so, consider how any of the following criteria should factor into your
pricing model decision:

 Market Maturity: Immature markets allow for greater pricing flexibility because no other
company or product has set the pricing bar. As markets mature, pricing pressure is created and a
loss of pricing flexibility occurs.

 Product Category: Highly innovative, breakthrough products have fewer pricing barriers than
incremental products which have a pricing history in past versions or releases.
  Demand: One of the most obvious and simple influencers on pricing to understand. High
demand allows for higher pricing, and conversely, lower demand pushes prices down.

 Value: The perception of benefit above the cost of the product. In other words, price is what the
buyer pays, but value is what the buyer receives. Value is subjective and influenced by image,
word-of-mouth, etc. Providing superior value allows for setting higher prices and it is an
excellent defense against commoditization, but difficult to measure.

 Competition: Establishes an upper-limit on price. You should always anticipate how

 Quality/perception of quality: Higher prices tend to signal higher quality, making buyers less
price sensitive. When quality cues are absent, sellers can use price to signal quality, but over
time, the market identifies the true quality leaders and will pay more for their products.

 Differentiation: Perhaps the most important criterion in this list. Highly differentiated products
are less price sensitive and enjoy some degree of protection against commoditization.

 Brand premium: Your brand is your Trustmark and buyers will connect at an emotional level
with brands they have come to trust – this is known as brand equity. If you have a lot of brand
equity, you can charge premium prices for the products you sell under your brand. Like
reputations, it takes time and hard work to develop great brands. Guard your brand, for just one
integrity failure can bankrupt it.

Some common pricing models are:

 Per unit
  Per user

 Per usage

 Per unit of infrastructure

 Subscription

Pricing Your Product

The final step in this pricing process is to set the price for your product. Test your pricing against real
sales scenarios. Recognize that it is difficult to optimize pricing for all market segments. Attempt to
find the pricing equilibrium that won’t cause you to leave money on the table for pricing too low, but
also not lose deals because the pricing is too high.

Compare your pricing to the competition to ensure it accounts for positioning and functional differences.
Help your sales team understand these differences and how they factor into your pricing.

Finally, it is critically important that the market “gets” your pricing. Make sure it is easy to explain and
understand.