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Everybody has a reasoned and valid opinion on how pricing should be set, from experience with past companies, watching competitors, ‘best practices’ articles, or even individuals influenced by the ‘IKEA effect’ bias. Rarely is there any alignment on the pricing objectives: the goal that pricing should help you achieve.
Here are some fictional examples that you might recognize from real life:
The CEO, who wants low prices to win more customers
Your head of product, who wants to charge more to reflect the product quality
A CMO who wants to use pricing to position for the mid-market
The CFO whose team put much effort into calculating COGs and wants to ensure a healthy profit margin
As a product marketer or person in charge of coordinating pricing, you might be tempted to lock stakeholders in a room and wait with baited breath for them to walk out, smiles and handshakes all around as they celebrate their new-found alignment.
Except… that doesn’t happen! You may appear to have a grasp of loose objectives, only to discover everyone else still has a different understanding. You can still be dealing with fallout from decisions that didn’t have full buy-in months after implementing.
So what should you do to keep your pricing process on track, and gain the confidence you need to move forward?
Gain clarity and alignment
At Kayako – for our failed product launch – we were introduced to the concept of pricing objectives by Chris Hopf, a pricing consultant, and iterated to find a regular, repeatable process of setting and revisiting pricing objectives that works for us.
We find this process helpful to:
get everyone on the same page
(occasionally) defend our approach against new, off-piste initiatives
Before any discussion, the leadership team receive individual spreadsheets, where each row is a pricing objective — you can find the list we use at the bottom of this article.
Each person is given 100 points and must divide this amongst the objectives they think are most important: the bigger the share, the higher priority. There’s just one other rule — no single objective can be allocated less than 20 points. With this approach, you’re forced to consider which objectives are truly the most important and make tradeoffs.
When evaluating the objectives, your leadership team need to consider how they will affect:
strategic company objectives
your customer’s perception of your brand and product
your organization’s resources
When all the responses are in, we bring them together in one spreadsheet. If necessary to rid the sheet of “noise”, discard all 20-point awards: if the objective was given the minimum score, then it’s a minimum priority.
We share the results with the leadership team in a structured discussion. The goal? Leave the room with confidence on what pricing should achieve for your business.
Your agenda might look like something this:
What is the top objective, and does that align with business goals?
Are there any outliers or anomalies?
Which objectives are most surprising?
Can we agree that the two priorities with the highest scores are the most important moving forward?
What impact will focusing on these two priorities have on the wider business?
Often, within 90 minutes we’ve got the alignment and direction necessary to continue along the pricing process with confidence and clarity at all levels.
Example pricing objectives
This is an incomplete list of pricing objectives you could use for your business. These are from a variety of sources, so make sure they are relevant before using them in your process.
Target return on investment
Target market share
Increase or accelerate market share (e.g. number of customers)
Maximize long-run profit (over a year or longer)
Maximize short-run profit (over the next quarter)
Grow sales revenue
Maximize customer lifetime value (encourage upgrades and expansion)
Maximize customer retention and reduce churn
Reduce new business pricing objections or reduce sales cycle length
Simplify for internal/operational reasons
Stabilize the market / compete on non-price considerations
Convey a particular image
Desensitize customers to price
Be the price leader
Discourage entry by new competitors
Match competitor pricing
Maintain distribution channel support and loyalty (e.g. partners)
Be regarded as “fair” by customers
Create interest and excitement
Use price of one product to upsell other products
Discourage others from lowering prices
Quickly recover investment specifically in product development
Generate volume in order to drive down costs
Prepare for sale of the business (harvesting)
Encourage the exit of marginal firms from the industry