I answered this question about pricing strategy on Quora and figured I´d turn it into a post as well.
Pricing strategy is the source of endless discussions in many companies because it is impossible to know for sure if you got it right.
There is no one-size-fits-all answer. A pricing strategy that works for one company can be disastrous for another that operates in the same business. The right strategy is dependent on many company specific factors such as your product, customers, cost structure, sales strategy and a number of others.
It is impossible to propose a pricing strategy that makes sense without more background information about your company, but here are some guidelines that you can use.
Make sure your costs, alternatives your customers have and the value you deliver are correctly reflected in the pricing plan.
You have to know all your costs. How much it costs to develop your product, sell, market, deliver, provide support etc.
Go in-depth here, list all your fixed and variable costs. Know how variable costs are impacted by different scenarios. For example, will your cost increase if the customer uses your product more intensely (e.g. server cost)? Are there setup cost that you pay for? How much will it cost to market and sell your product?
A complex sales process means you need to hire sales people. Your pricing strategy has to allow you to recoup their salaries. The same for partner commissions if you´re opting for a channel sales strategy.
This post illustrates how not considering cost structure in a pricing plan could sink your company.
Know what other options you potential clients have to meet the need that is addressed by your product. Analyze your competitors their offer and don´t just focus on functionality & pricing, but also look at how their sales and marketing strategy differs from yours because this has an effect on their pricing.
Don´t focus too much on what they “big guys” are doing because you assume that their pricing is the result of in-depth studies and very sophisticated models. That is almost never the case. They are in the dark, just as you are and whatever pricing they came up with is usually whatever occurred to the highest paid person who happened to be in the pricing strategy meeting.
Realise that competition does not only come from other companies in your space. Another alternative clients have is developing a solution in-house. Your product should obviously not be more expensive than a DIY solution.
Your product´s value
This is the most important factor. Customers will determine if it is worth paying the pricing you come-up with based on the value they get. The more value you can deliver, the higher you can price your product.
To determine the value consider how your product enables customers to increase revenue, efficiency or decrease costs. It is helpful if you can quantify this. An exact number will make it easier to sell your solution and you can price your product to capture a reasonable percentage of the value you provide.
Pricing structure is also influenced by value. When a product´s value is tied to features & functionality most companies adopt user based pricing. An example of this is ERP software.
When value is delivered by consumption, for instance, a SaaS that connects with your favorite payment gateway and automatically generates an invoice each time you get paid, a subscription model with different tiers based on usage is usually the best option.
When in doubt, charge more!
But how much should I charge exactly? As much as possible.
Low prices attract the type of customers you don´t want. If you doubt that, ask anyone who is running a business. Customers who pay more are, almost without exception, the most professional and pleasant ones to deal with.
Also, if you want to adjust your prices in the future, decreasing is much easier than increasing.
Hope this will help you come up with a pricing plan that works! After that, the next step is thinking about regional pricing, multi-currency pricing, bundle pricing, discount management etc… It never ends 🙂