The key to your pricing strategy — are customers.

I’m currently figuring out the pricing for an MVP product.

Often, pricing is set with a cost in mind and then adding what you want to earn on top. This is pretty much the easiest way to build your P&L. However, this is why that’s not a good idea. Rafi Mohammed, founder of the consulting firm Culture of profit, in this podcast for HBR, shares a lot of great examples that illustrate why is that so. And this idea about pricing resonates with me because it provides more reason to love yourself when you create awesome products that people love 😁.

First, you need to think about the price as a value your product gives to people. Not as an ROI for your cost. And this is fair; if you did a lousy job at creating your product, why should anyone pay for your cost? The best way to understand that value is through talking to your customer and observing their behavior.

Second, you should think about what’s the alternatives and their price? If the customer is not ordering your product, how much customers will pay for a similar product? If you’re uber, how much customer will pay for Lyft? If everyone giving some additional perks for free, and you’re asking the money for them, you will be viewed as a scam. And that is in no way help build trust with your customers. A good case about price here is how street entrepreneurs higher their prices on an umbrella as soon as the rain is starting. And it’s one of the possible options to capitalize, but is that the best one? I would say no. Although it does work 😁

Third, what are the way you can help customers buy your product? This is not about the discount, but rather smart discount programs or reward programs that target customer fears about not spending more. An example that Rafi gives in the podcast is about a car company which, during 2008, offered a program in which the customer loses their job; they can return the car no questions asked. Analysts proclaimed the program a success when Hyundai reported U.S. sales were up 14% in January compared to the same month a year earlier, while the entire U.S. auto market fell 37%.

In the podcast, Rafi mentions the model good-better-best, which is adopted by airline companies. I find it a great model for SaaS, subscription products, and maybe even any product 🤷🏼‍♀️ where you have different pricing tiers. This shows how the value that customer gets is different based on how much the customer is paying. For me that model looks like a fair game: if you’re paying for a standard economy seat, you’re not getting leg space or food & beverages at no cost. And it’s a totally different story with business class tickets. I do think that we should build products the way that customer support & customer experience is fair across all tiers. So that the air attendant is the same way polite with economy class passenger vs business class.

Some more references on pricing:

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