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How do you best calculate a price for a new product?

echojason@gmail.com'

JASON LEMKIN

Comps. Comparable Products.

You really do need to start here. And then — Anchor High, Same, or Low.

Most software costs essentially nothing to “ship the bits”. And customers don’t really care how hard it is to build. Google search is hard to build. And it is free.

And yes, you can “value price”. But even value has to have context.

If I pay $100k for an S-Class Mercedes … then it turns out, $100k for a Tesla Model S seems fair. ONCE Tesla decided to turn the Model S into a Mercedes S-Class competitor. It didn’t start there. But that ended up being its comp.

So first, pick a fair comparable. It doesn’t have to be a competitor. Just a product that provides similar value to a roughly similar type of buyer.

Then decide in your gut if your product is more valuable than the comp.

If so, Anchor High. If the customers also believe you are more valuable than the comp, they’ll pay more. If you are truly 2x as valuable as Salesforce to an enterprise, you really can charge 2x more. At least, you can work up to that.

But if you are a scrappy competitor, feature poor — but cool. Maybe then Anchor Low or Same. Maybe don’t come in higher than Slack.

And remember, unless you are a true commodity, “cheaper” usually isn’t a pricing strategy in software. Brands matter. Trust matters when you are running your entire business on a piece of software. 90% of customers don’t want the cheapest solution — they want the best solution. Yes, some products like Twilio, Sendgrid, AWS, etc. do have a fair amount of direct price sensitivity. But even there, the value they provide and their brands allow them to charge more than the “commodity” pricing.

I can tell you as an ex-VP at a Fortune 500 company … enterprise products with similar enterprise value in the end have similar enterprise pricing, all-in.

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Published on May 24, 2017
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