Is Your Pricing a Dot or a Triangle?

Most product managers I know secretly (or not-so-secretly) dread pricing.  Price too high, and you risk alienating customers; price too low and you’re undervaluing yourself and making it harder to raise prices later.

We stress so much about that number that we tend to forget that “price” isn’t a single number to our customers.  When customers consider “what something costs”, they’re actually measuring three main drivers:

pricing_triangleMoney: The obvious one.  What am I going to pay in dollars and cents?

Mental energy: How much do I have to think about this?

Time: How long will it take to learn/deploy/configure?

As you can probably guess, these points aren’t independent. The reason “free” is so psychologically powerful is that it entirely removes the “money” axis and strongly reduces the “mental energy” axis.

I don’t have to think about “free” at all.  Paying even one cent – that requires some mental energy.  I need to enter a credit card number, or remember my PayPal password.

For someone who works in a large-ish company, a $500 purchase may be very low mental energy – they can charge and reimburse it without additional work. A $501 purchase might mean writing up a description, asking for pre-approval, getting a signature, having to write up a purchase order… a huge increase in mental energy over an additional dollar.

Time and money are related when the product requires expensive consulting, or steals an expensive internal resource from whatever they were working on previously.  Also, long deployment cycles can mean paying for a service for months before starting to see the benefits.

Which shape should your pricing triangle be?

Market maturity and customer priorities determine how high or skewed your triangle can be.

commoditytri1

Commodity Product, Mature Market

For example, a product in a mature market that has seen commoditization can’t be very high on any dimension.  If I’m looking at, say, dryer sheets, I’m not going to choose an option with a higher price tag, or a set of warning labels and detailed instructions, or one that increases drying time.

I just don’t care enough.  Some dryer sheet maker would have to come up with a truly disruptive innovation before I’d even consider increasing my “cost” on any axis.

newtechtri New Technology, Early Adopter

On the other hand, take the first-generation MP3 players.  They were expensive.  You had to find software to rip your CDs, and then often another piece of software to load the music onto them.  It probably took 45 minutes to load up my Diamond Rio for the first time with a whopping 45 minutes’ worth of music.

The early adopter is okay with spending more money, expending mental energy, and spending time futzing with this new product.  Everyone else… is not.  This has led many a product down a bad path.

lowcosttri

Cash-Poor, Time-Rich

If your target customer is a high school or college student, this is what your triangle may look like.  Don’t incur costs trying to make the installation faster or the instructions easier – do whatever you can to make it free or cheap.

lowtimetriTime-Poor, Cash-Rich (or adequate, anyways)

Why does Amazon OneBox exist when BitTorrent is out there?

Because to this audience, it’s not worth the time of searching for a specific episode among a bunch of crap, waiting to download, dealing with corrupted files… when you could just pay a couple bucks and get your missed TV show with One-Click.

For this market, don’t worry about your pricing being too high.  (If it is, you won’t permanently scare people off; they’ll come back when you adjust it.)  Worry A LOT about how to make the purchase a no-brainer.  Write better documentation. Streamline your checkout process.  Invest in making deployment incredibly fast and easy.

37 thoughts on “Is Your Pricing a Dot or a Triangle?

  1. Nice post! It sometimes feels like figuring out a pricing model is harder than building the actual product:) Your 3 axis model does a great deal to simplify needs however it often seems that there are other additional complicating factors that show up sometimes in the consumer market place but very often in the B2B marketplace.
    For example: Who’s buying/paying vs who’s using can have big impacts. If the high schoolers parent is typically the once paying then does that change the pricing model? This is also very relevant in most B2B product sales.

    Another might be external factors tied to urgency such as legal, compliance in business or maybe a health issue for a consumer. Arguable thought urgency likely increases their available mental energy in your triangle.

    Thoughts?

  2. Nice post! It sometimes feels like figuring out a pricing model is harder than building the actual product:) Your 3 axis model does a great deal to simplify needs however it often seems that there are other additional complicating factors that show up sometimes in the consumer market place but very often in the B2B marketplace.
    For example: Who’s buying/paying vs who’s using can have big impacts. If the high schoolers parent is typically the once paying then does that change the pricing model? This is also very relevant in most B2B product sales.

    Another might be external factors tied to urgency such as legal, compliance in business or maybe a health issue for a consumer. Arguable thought urgency likely increases their available mental energy in your triangle.

    Thoughts?

  3. Kevin: Very true. It can be really insidious in the B2B situation when one team pays the $ cost and another pays the time/mental energy costs… you may have a signed contract and wait months until you can recognize revenues.

    I don’t think it changes the “shape of the triangle” but it can lull you into a false sense of security if you are assessing only one stakeholder and there are multiple.

  4. Kevin: Very true. It can be really insidious in the B2B situation when one team pays the $ cost and another pays the time/mental energy costs… you may have a signed contract and wait months until you can recognize revenues.

    I don’t think it changes the “shape of the triangle” but it can lull you into a false sense of security if you are assessing only one stakeholder and there are multiple.

  5. Cindy, GREAT post, and distills a lot of theory. I did a huge effort of price positioning earlier this year (needed the hard data to back up what you essentially put in your triangle) and what it largely told us was the value that customers (actual paying customers, not our internal, elevated egos) thought our products had, and how to better position us.

    I have added you to my twitter follows, and will check back regularly.

  6. Cindy, GREAT post, and distills a lot of theory. I did a huge effort of price positioning earlier this year (needed the hard data to back up what you essentially put in your triangle) and what it largely told us was the value that customers (actual paying customers, not our internal, elevated egos) thought our products had, and how to better position us.

    I have added you to my twitter follows, and will check back regularly.

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