In a recent webinar episode, Madhavan Ramanujam, co-author of Monetizing Innovation, shared insights on how to design products and services around the price.

A stand out tip Madhavan provided to listeners were around the common mistakes companies tend to make when thinking about pricing products. Even if you’re getting out of the building and having the “willingness to pay” conversation with your customers, you can still easily fall into the three traps below when it comes to pricing:

Common mistake #1: One-size-fits-all pricing

‍There’s a tendency for companies to think that all of their customers will act similar; and in turn, the company will build a “one-size-fits-all” product and price. This mistake is especially true when you’re building a product from scratch. Madhavan refers to this term as “one-size-fits-none”, because the approach fails to understand the types of market segments you may have, and productizing towards them. Companies can easily make the mistake of thinking that their customers are homogenous.

Madhavan suggests: Truly understanding markets and segments is important. By doing this you can prioritize which segments to go after and productize toward what your segments need, what they value, and what they are willing to pay. People pay what they pay based on different preferences and value perceptions they may have. For example, think about the water we drink. Water from a fountain is free, but when you put it in a bottle you might charge $2. If you make the water carbonated, the price might $2.50. If you sell the water from a mini-bar, the price might be $5.  

Common mistake #2: Emphasis on how much to charge versus how you charge

‍Companies put a lot of emphasis on getting the product right, but not necessarily how it can be monetized. Thus, the second mistake is focusing more on how much to charge customers versus figuring out how to best charge the customer. One classic example of this mistake is in the software world. Software companies will immediately gravitate towards pricing on a per-seat basis, and it tends to leave a lot of money on the table.

Madhavan suggests: How you charge is often more important than how much you charge, and keeping an eye on that is important. For example, Optimizely, a firm that makes customer-experience optimization software, spends more time aligning their product with the value their customers derive. So instead of a per-seat model, they offer pricing based on the unique monthly visitors a customer’s business attracts online. This is one approach that works not only in Optimizely’s favour, but also in their customers’ favour.

Common mistake #3: Treat pricing as a purely numbers exercise

‍The third way companies go wrong with pricing is by treating it as a numbers and mathematical exercise. At the end of the day, your customers are probably more irrational than they are rational. For instance, a strictly mathematical pricing exercise might tell you to price your product towards $25, and it may not click with your customers’ needs at all.

Madhavan suggests: Tapping into behavioral pricing tactics is a must. You want to validate if there is a psychological threshold to how much your customers are willing to pay. For example, you might have a product that’s $19.99--this could be a threshold to your customers. But if you price that product up to $20, a large proportion of your customers might find the pricing to be expensive. You need to be aware of those cliffs. You need to really understand what the behavioral and quantitative aspects are and why that difference matters to your customers.

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