Pricing innovation, one of the most common questions we get from clients, has been the topic of several recent posts. Here’s one more to tie them all together*.
To many, pricing innovation feels like more art than science. To some, it feels more like throwing a dart at a board blindfolded than art. But there is a strategy behind pricing innovation even though it can be a bit of trial and error. By establishing a value-based price and operating with discipline not to unnecessarily discount it, you can launch innovative solutions profitably and successfully.
What are the problems with pricing innovative solutions?
- You’ve guessed at the price. Yes, it was an educated guess based on customer-driven, value-based inquiry, further narrowed by complementary, competitive, and alternative offerings. But it was still just a guess.
- You’re afraid it might be too high. (For goodness sake, it had better be. Far better to be too high than too low. Read this if there’s any danger it’s too low.)
These are problems because customers don’t yet understand the value of our solution. If the price is too high, customers won’t buy it. They won’t try it. And if they don’t try it, they’ll never find out they love it, they need it, and then they won’t buy it again. They won’t tell their colleagues, business associates, friends, etc. In other words, you will not sell enough of your carefully developed innovation, and it will flop.
To prevent this problem, you must first understand what is at work with your customers. Customers are more price sensitive to innovation. Initial price sensitivity is higher than long-term sensitivity because the solution is unproven (to them). To address this, a strategy to overcome the hurdle of the initial price sensitivity is needed without lowering the bar for pricing forever. In other words, it’s important to induce the customer to try the product but not to create an expectation of a low price that will continue past the initial period.
How? A one-two punch of education and promotion:
Customers will never pay you what you are worth. They will only ever pay you what they think you are worth. But I invite you to see that as an opportunity rather than a problem because you can direct their thinking about your value. You have a large role to play in helping your customers understand the value of your innovation. There’s an opportunity to push the pricing and profits to the very top of the fuzzy gray zone that exists around the value of innovation. Continuously iterate to improve the compelling story for customers about the value of your innovation.
There are helpful pricing structures and risk-limiting pricing devices to induce trial and pressure-test your launch price. These mechanisms can help you evaluate your pricing and iterate towards highly profitable pricing that is still attractive to customers.
The key to any pricing designed to induce trial is to ensure it complies with these objectives:
- Temporary: It is clearly established as a promotional pricing structure so that it does not create a long-term expectation of lower pricing.
- First-Time Buyers: It is clearly established to target only those customers who have not previously bought your innovation.
- Not a Signal of Low Quality: It is clearly designed to induce trial and is not a signal of a budget solution, low quality, etc.
Typical promotional strategies are trial offers, discounts, rebates, free samples, coupons, freemium models, etc. These promotional strategies can also serve in some cases as ways to test pricing:
1. First 100 Customers to Buy Receive 10% Discount – Allows price testing; if sales are very fast, the discount expires quickly and profits soar. If sales are sluggish, the discount can quietly become rolled into the permanent price.
2. First 3 Months “Introductory Offer” of $100 Off – Like #1 above except it is time-limited except count limited. Same strategy applies.
3. Three Month Subscription Free Then Full Price – Classic freemium model.
4. Full Price for Six Months Then Six Months Free – Useful where implementation is very expensive for SaaS company to roll out and classic freemium model is untenable.
5. 100% Money Back Guarantee – Guarantees are useful to reduce sensitivity for innovation because the risk is less in the price than in the value.
6. 200% Money Back Guarantee – This shows customers that you are so supremely confident in your solution that you will pay them if it doesn’t work.
Speaking of avoiding creating a long-term expectation of lower pricing, sometimes free is better than discounted. (WHAT? Yes, it’s true.) Why? Sometimes giving away one (one unit, one free month, one component) is the best way to induce trial while avoiding setting a long-term expectation of discounted pricing.
So, to ensure the highest prices possible for your innovative solution, make an educated guess based in value, price as high as possible, and then educate and promote to induce trial.
* This is the final installment in a series of three posts about how to price innovation. In our first post, we addressed how to make an initial risk-mitigated, educated guess at pricing for your innovation. In the second, we advised never to underprice innovation and outlined the dangers of doing so.