17. Pricing Strategy

Pricing Strategy

Factors to Consider When Setting Pricing

• What value does the user get from using the product?
• What does the product cost to produce?
• What is your company's goal for the product?
• What do competitors charge?

Things to Remember About Pricing

• The price can't be higher than the value your users get from the product
• In most cases, the price can't be lower than the long term cost to produce it
• The product's price must be consistent with goals for the product
• The price can't be higher than a competitor's price, unless you have a product that does a better job of meeting the user's need

New Terms

Ad Supported: The product is free, but it generates revenue from advertisers.
Cost-based pricing: The cost to produce the product is the base price and a mark-up is added.
Dynamic pricing : Price changes reflect changes in supply or demand, e.g. surge pricing.
Freemium: The basic product is free but you can purchase additional features or content, e.g. Dropbox.
Price discrimination: Different users are charged a different price for the same product, e.g. US airline tickets.
Value-based pricing: Price is based on the value the user gets from the product.

As a PM, it is not your job to be a pricing expert. But you do need to understand the basic principles of pricing strategy and how your product fits in.

True or False: Companies can have varying pricing strategies for different parts of the company

True

False

SOLUTION:

True

QUIZ QUESTION::

Match each definition to its pricing model

ANSWER CHOICES:

Value-based

Dynamic

Ad-supported

Cost-based

Free

Freemium

Price discrimination

Definition	Pricing Model
The product doesn’t cost anything
Price varies based on the user you are selling the product to
Price fluctuates based on marketplace dynamics, like supply and demand
Price is based on how the user perceives the benefits of the product
Price is based on the effort it takes to produce the product, plus a markup
Revenue is generated by displaying sponsored content in the product
Parts of the core product don’t cost anything but you can purchase additional functionality

SOLUTION:

Definition	Pricing Model
Price is based on how the user perceives the benefits of the product	Value-based
Price fluctuates based on marketplace dynamics, like supply and demand	Dynamic
Revenue is generated by displaying sponsored content in the product	Ad-supported
Price is based on the effort it takes to produce the product, plus a markup	Cost-based
The product doesn’t cost anything	Free
Parts of the core product don’t cost anything but you can purchase additional functionality	Freemium
Price varies based on the user you are selling the product to	Price discrimination

Which of these are reasonable financial goals for a product?

Generating revenue

Creating product for a fun

Market dominance

Reducing costs

SOLUTION:

• Generating revenue
• Market dominance
• Reducing costs

QUIZ QUESTION::

Airline ticket prices vary widely and use multiple pricing models. In each of the situations below, a passenger will pay a higher than average ticket price. Which pricing model is the primary driver of a higher price?

ANSWER CHOICES:

Price Discrimination

Dynamic Pricing

Value-based pricing

Cost-based pricing

Ticket Purchase Scenario	Pricing Influence
Holiday weekend ticket
Student discount
Long distance route
Business Class ticket

SOLUTION:

Ticket Purchase Scenario	Pricing Influence
Student discount	Price Discrimination
Holiday weekend ticket	Dynamic Pricing
Business Class ticket	Value-based pricing
Long distance route	Cost-based pricing