Far from being a math problem that relies solely on the concepts expounded upon in classical economics, pricing is a problem whose solution is part art and part science and relies on both marketing and human psychology in addition to economic theory. This tutorial covers strategies that will aid you in your quest for increased profitability and happier customers by helping you figure out how to price your product.
While pricing, according to economic theory, is a simple problem that posits a producer will go on producing a good until they don’t lose money on the last item produced, the theory doesn’t translate well to the business models of technology companies — especially SaaS companies. For such companies, the marginal cost of delivering an additional unit of the good to the end-customer is essentially zero. Therefore, following the theory will lead one to price the good for free and make it impossible to recoup the fixed costs of production.
While most companies enter markets with some competition, a lot of technology companies produce new and innovative products and have no direct competitors. This precludes us from using the other textbook approach to pricing — benchmarking our offering against the competition’s.
Given these constraints, it’s important to form hypotheses to set prices. From the starting point, one can start A/B testing and other analytical methods to arrive at a finer estimate. In addition to gathered analytics, it is also important to get feedback from customers and partners on their view of the competitive environment and to gauge their willingness to pay. Pricing is a complex problem that involves competitive analysis, a judgement of the customers’ maximum willingness to pay, and hypothesis testing.
The following strategies may be employed to determine the price of your services: