I’d like to talk about pricing, i.e. how to choose what you will charge for your product or products, but it’s a really complicated topic. Your “price” will depend on many factors—in fact you may have many different prices depending on the type, size, region, and industry of the end customer as well as who is actually selling the product. So I will split this big topic up into at least two or three articles, explaining some fundamentals before we get into the process of picking any actual prices.
For this first article I will dive into sales channels and different types of customers groups. In the next article I’ll cover different pricing models for products and services, including basic purchase models and subscriptions as well as license metrics, plus how you can handle pricing based on the channels discussed in this first article. And if things are going on a bit too long, then I’ll cover discounting, your pricing model, and the process of actually choosing pricing in a final article. So let’s get started!
What You Are Selling
Before you think about pricing, you need to think about what you are actually selling. Seems simple, right? As any marketer will tell you, however, even if you are building widget X you might actually be selling something else—a lifestyle, convenience, etc. You might think you are selling an endpoint security product where the value is in how many files it scans for malware, but from the customer’s perspective what they care about is how many devices are protected against attacks. In today’s world, so many “products” are actually sold as subscription services especially in the software arena, and the value derives partially from what the product itself delivers, but also from regular updates to that product.
Similarly, you might be creating a product that might benefit some end customer—say, a small business—but that product may actually be delivered by a third party. As an example, I’ve worked with several companies that build security solutions that are installed and managed by third-party Managed Service Providers (MSPs); the customer rarely even touches the software and may not even know the name of the vendor. The same basic concept applies to OEM (Original Equipment Manufacturer) deals and other scenarios.
When you first start out, you might only have one thing to sell: your first product. But even in these early stages, it might make sense to think about where you go from there: can you envision a premium version of your basic product? Could you create separate chargeable add-ons or plug-ins? Every marketer knows about choice architecture and how most buyers, when presented with three options, will often choose the middle one—even if it’s more than what they really wanted in the first place. Your choice of how you architect your future product portfolio with bundling, add-ons, etc (and similarly how you price the various options) will depend on your product(s) and your customers’ expectations.
Multi-tier Channels
Roughly speaking, we tend to divide the universe of products and services up into consumer products i.e. a business (you) selling to an individual or family (a.k.a. business-to-consumer or B2C), and business products (a.k.a. B2B). For both categories there are often multiple levels of other companies between you as the vendor and the end customer, and thus for example you may have B2B2C engagements where you might sell to a retailer who then sells to the end customer. In the B2C world, you are often selling to retailers who have storefronts or online stores, even if you sell via your own website as well. In the B2B world, you may strike up partnerships with resellers who can connect with many more customers than you could on your own. And in both worlds, once you get big enough you may end up working with distributors to achieve national or global reach.
The channel tradeoff is pretty simple: you can only do so much selling on your own. If you happen to have a generous financial package and can hire a bunch of salespeople, they can only contact and sell to so many people or businesses. Whereas if you work with a retailer, reseller, MSP, etc they might give you instant access to hundreds if not thousands of customers. Sometimes we think that if we just have a really cool product and some slick marketing, the world will beat a path to our door (or website). In reality, it will almost always take a lot of patient, hard work to build a groundswell of customer interest. Partners can help in this effort: if you have a great product, offer them good terms, and then support them well they can multiply your reach. The more work your partner does to help you sell your product, the greater a percentage of the final sale price they will expect but they can multiply your sales reach and allow you to target markets you can’t get to on your own.
To give you a quick example, a company I worked with sold both consumer- and business-class antivirus solutions. On the consumer side, we had a website where individuals came and purchased up to 10 licenses at a pop, plus we had a network of system integrators (basically companies that set up PCs for people) and other online retailers. We also had a deep relationship with the Home Shopping Network (later QVC), and when they’d run a spot for our product we’d see thousands of orders. On the business side, we did some business through our website (mostly smaller 5-50 seat orders) plus some larger direct deals, but most of our business was through a network of hundreds of resellers. We also worked with some of the large global distributors like Synnex and CDW. Not only that, we also worked with MSPs and RMMs (Remote Management and Monitoring, who act similarly to distributors for MSPs). And note: each of these distinct channels had different pricing.
Packaging
To bring the two areas discussed above together—your products and your channels—let’s talk about packaging. In addition to different pricing, each channel may receive different packaging. This might be due to the disparate needs of the various channels, or just how you want (or are able) to present your brand in those channels.
Although there are a million variations, I’ll draw on my experience from the company I mentioned above because it covers a lot of the options. Our consumer products were primarily delivered via electronic download, paired with a license key that might be given to the customer by us directly, or by one of our retailers. If a retailer sold the product, the customer would likely receive an email that included their key and a download link. For Home Shopping Network, however, they wanted actual physical media so we would create printed packaging with a CD, and later a USB device, and then package that with a printed license key card.
On the business side, we had both an on-premise installable product and a cloud variant. The on-premise option included a management server, and the endpoint AV agents were deployed from there. This variant was sold similar to the consumer product: the software was downloaded from our website, and the seller (us or the reseller) provided a license key. The cloud variant however asked the end customer to set up an online account to access their management console, and we had special URLs that we gave to our resellers (or we pre-registered the end customer in our backend) such that when the end customer created an account, we could associate it with the reseller. The UI also changed a little bit: when the customer logged in to their licensing screen, they saw different information for sales support depending on the channel through which they were sold the product. But we also sold through MSPs, which was a completely different experience. In this scenario, the MSP would set up their own account and get a centralized console, from which they would create customer accounts and then set each of them up. Pricing was also completely different, as we used metered monthly billing instead of annual subscriptions (more on this later).
And to wrap this up, we will discuss yet another channel: Original Equipment Manufacturers (OEM). This refers to selling your product (or some component of it) to another vendor, who takes your product and embeds it inside their own product or service. OEM arrangements might give you a percentage of each unit the other vendor sells, or a fixed per-unit cost, or a single up-front fee, or some combo. OEM (and some reseller/MSP arrangements) may also trigger different packaging; maybe the vendor wants your products’ capability to do X but doesn’t want your UI. Similarly, your brand presentation may be affected, as some vendors might be happy to present your product with your brand, some may want to hide your product completely under their brand (white-labelling), and some might want to lead with their own brand but are willing to show your brand as the source of the tech (a “powered by” strategy). And, of course, each of these decisions affects your pricing.
Pricing Strategy
Different companies deploy different pricing strategies, and these may evolve over time depending on the product they are selling, the state of the market, and the state of the competition. Nearly all products face SOME kind of competition in the market, either from direct competitors who have very similar products, from companies that have products that do something that is “close enough” to what the customer wants, or from companies that have large, market-dominating products and introduce a feature that makes your product less valuable. And of course there’s always competition with the “do nothing” option, where the customer decides it’s not worth the cost to buy the product.
Most companies want to sell their products based on value: the features the product provides and how great they are compared to anything else on the market. In this view, pricing should be an afterthought and should only be considered after your amazing salespeople have had the chance to sell the customer on your whizbang features. But most buyers nowadays do nearly all of their market research online well before you get a chance to speak to them, so it is increasingly hard to “hide” your pricing. I for one am an advocate of simple, transparent pricing made easily available on your website so that customers know exactly what they’re getting. If they decide to go with one of those vendors that hides their pricing, and then get sticker shock when they are nickel-and-dimed by some complex pricing scheme, they’ll learn that lesson pretty quick.
Publishing your pricing sends a message about your product. Some companies intentionally set their starting pricing very high; this can give customers the impression that the product has a lot of value. Other companies try to sell on price: they show a very low price hoping to attract more customers. In some cases competitors will end up in a price war with everyone lowering their pricing until no one is making any money.
Another strategy often employed in the B2C space is publishing a high starting price and then offering a dramatic discount. Often the discount is only available for a specific time period. This is intended to signal to the customer that they are getting a lot of value for a great deal, and they’d better act now. This works less well in the B2B space since buyers are typically more savvy and deal cycles are longer. That said, some vendors do have fairly high public pricing but will give away a lot of discount to win specific deals.
There are also a number of pricing strategies that have to do with how products are discounted for specific market segments: government, education, larger customers, etc, but we will cover these in more detail when we explain those discounts in a future article.