How to think about pricing strategy - a quick start guide

Today, let's dive into the intricate world of pricing strategy and monetization decisions. It's a topic many teams grapple with, from setting list prices to figuring out the perfect bundles and responding to those competitors who seem to be in a perpetual price war. I want to be your guide through this maze of questions, providing you with insights and a roadmap to tackle these challenges head-on.

Unraveling the Puzzle: The State of Pricing Strategy

Now, I know you've been in the thick of it, dealing with pricing questions from all angles. How much should we charge? Are our bundles hitting the mark? And when competitors decide to lower their prices, what's our move? It's a constant battle, right? Teams across various departments, be it finance, marketing, or the executive team, are in the trenches, facing a barrage of pricing dilemmas.

But here's the thing – most teams, maybe even yours, lack a solid framework for tackling these decisions. It's often a reactionary process, decisions made on the fly without the necessary data. I get it; there's always something on the to-do list. Most teams don't even have someone whose sole focus is to manage, optimize, and monitor pricing strategy. That's a challenge.

The High Stakes: Why Pricing Strategy Matters

Let's talk about the stakes, and they couldn't be higher. You see, a lot of new products fail, and one of the biggest reasons? Pricing strategy. If it's not in tune with the market needs, products can tank. And it's not just new products – even existing ones are on the line. There's a financial impact, both seen and unseen, when decisions about pricing go south.

Think about it this way – you might win a deal at ten dollars, but what if you could have won it at fifteen? On the flip side, losing a deal at ten dollars might mean missing out on one you could have won at eight dollars. It adds up, and we're talking about billions of dollars missed due to poor pricing decisions. The impact extends to gross margins, customer lifetime value, conversion rates – it's a big deal.

The Call to Action: How to Make Price and Strategy Decisions

Now that we've set the stage, let's talk about the game plan. How do you, the savvy decision-maker, approach pricing and strategy decisions? How do the experts from around the globe tackle these challenges?

In a nutshell, it's about using the scientific method. You want to bring the same rigor you apply to deciding what product to build, who to hire, or whether a merger and acquisition makes sense. These are big decisions, and pricing strategy deserves that level of attention.

The Five-Step Pricing Strategy Process: Your Playbook

Let's break it down. When I'm knee-deep in a pricing strategy project, I follow a five-step process.

Step 1: Forming a Pricing Committee

Seems counterintuitive, right? But it's critical to success. A pricing committee, a group of diverse minds meeting regularly to discuss price and strategy decisions, sets the stage. Why? Because pricing decisions aren't siloed; they impact the whole company. Marketing, finance, executive teams – everyone needs a seat at the table.

Step 2: Developing Hypotheses

This is where your team gets to shine. Capture those pricing hypotheses based on experience and customer interactions. Categorize them, get ready for the next step.

Step 3: Gathering Data

Data is your ally. Distinguish between stated preference and derived preference data. Interviews, surveys, experiments – industry best practices come into play here. It's about collecting the right data to validate or refute your hypotheses.

Step 4: Running Experiments

Pilot your pricing hypotheses. Test them with a small group of customers. This mitigates risks, and you can tweak your strategy based on real-world results. No need to roll out changes to the entire customer base and hope for the best.

Step 5: Continuous Monitoring and Optimization

Don't fall into the "set it and forget it" trap. Continuous monitoring is key. Markets change, sentiments change. Someone needs to ensure that your pricing strategy is still delivering the impact you want. Be that someone.

In Closing: Your Guide to Mastering Pricing Strategy

So there you have it. A guide tailored for you, the decision-maker navigating the intricate landscape of pricing decisions. By forming pricing committees, developing hypotheses, gathering data, running experiments, and continuously monitoring results, you're not just understanding but mastering the art of pricing strategy. It's your beacon, your roadmap to confidently steer through the challenges of modern business.

Good luck, and happy pricing!