18 Jun 2018  |  Guide

How to Make an Impact Through Pricing Optimization

6 minute read

As there are numerous types of pricing, we wanted to outline the main three models and which offers the most growth.

Pricing your software launch smartly should be one of your main objectives; launch sales are a huge opportunity to make a big splash in a very short space of time. It’s important to be sophisticated when considering a pricing strategy, because you’ll want to avoid wasting all the hard work (and money!) you’ve spent building your product.

Pricing comes in many forms. Here are the three pricing models we see our sellers adopt most frequently; cost-plus, competitor-based and value-based. They each have merits but not all suit every strategy.

Cost-Plus Pricing

Cost-Plus is as simple as it sounds. You work out your fixed and expected variable costs, and add an appropriate margin on top to get a fair price.

This model focuses on covering your costs with each purchase. It doesn’t however factor in unexpected variable costs once you’ve started selling, and you won’t be able to change the price everytime a new cost occurs.

It’s the most rudimentary form of pricing, which is why we see a lot of early stage companies pricing this way when they start out, because they don’t have the time to expand their pricing strategy.

Cost-Plus also gives you very little flexibility to offer promotions, discounts and other incentives for customers to buy without becoming loss making. Customers also don’t really like to purchase in this way, especially if they realise that’s how the product or service has been priced. It may cover your initial costs but if you’re intending on growing your company past this, you’ll definitely want to consider other models than cost-plus.

Competitor Based Pricing

Competitor based pricing is a model that uses your direct competitors as a barometer of how to price your software. Through a brief look at your competitors’ pricing, you’ll be able to place yourself potentially in a perfect middle, not losing money but also not pricing yourself out. You won’t be a pricing outlier in the market, as you’ll be following the crowd when pricing during your launch.

Mackeeper pricing

Machshiny pricing

But that’s also the limitation of solely using competitor pricing: it’s tailored to your competitors’ needs as a business, not yours. If you stay in the middle, it could lead to your business stagnating - limited by an unwillingness to price your product above your competitors. If you set your pricing unreasonably low to match your more established competitors, it turns into a race to the bottom, trying to cut margins unnecessarily, which could set your company back permanently.

Competitor pricing definitely serves best as theoretical rather than practical pricing strategy, to benchmark what a customer is willing to pay or identify an example price of in your current market.

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Value-Based Pricing

Value-based pricing consists of finding a price relative to how much the customer believes your software is worth. Instead of focussing solely on your costs or competitors, you’ll consider first your customer personas.

We’ve previously focussed on customer personas, but let’s recap. Personas are created to simplify and classify your ideal customers into clearly identified personalities - considering their pain points, perspective, routines etc. This can be informed by talking to existing or potential customers - asking them about their experience with the product, when they had a problem, why they decided to look into it, and how things went from there. There’s also the more positive element to buyer personas - getting them to articulate what it is that wows them about the product - or about how the product has exceeded their expectations.

With your personas created, you’ll now be able to gauge their readiness to pay a certain price - possibly more than your competitors for your software. This means your product has to reflect the needs of what your customers actually want, whilst also having features and product updates they’d be willing to pay extra for. If you believe your software adds more value than your competitors, then you should reasonably charge more for that added value.

It’s worth noting that although the persona defines the expectations of your ideal buyer, you also need to pitch your product to your market. It’s a balancing act between what you think it’s worth and what the market is willing to pay.

Value-based pricing will be the best representation of what people are willing to pay for your product. However, knowing the value of your product from previous launches will definitely inform how much customers are willing to pay, backed up by the customer personas.

If this is your first launch, you may need time to build up these personas as value-based pricing requires research. You should also beware of pricing yourself too high, as you could be undercut in price unless you offer more value than your competitors.

A value-based pricing strategy allows you to start at a higher price point and if you are increasingly delivering value you can reasonably raise prices. We recommend starting with evaluating your prices every six months when using this strategy.

Your Pricing

Let’s compare how CleanMyMac from MacPaw would price according to these 3 models.

Using cost-plus pricing, CleanMyMac would cover their initial costs but would have to offer a heavy increase in price, especially if they wanted to cover advertising costs or pay for additional staff. There would definitely be pushback from their new customers if a heavy increase was made, unless it was for an upgrade that added something new.

For a competitor pricing model, they’d see that Mackeeper and Macshiny are clear competitors in the Mac optimization market. Let’s take both of their standard monthly plans, which vary from Macshiny’s $11.95 to Mackeeper’s $15.96. If CleanMyMac was using this model to price themselves in the middle-ground, they’d go around the $13.95-14-95 mark, undercutting Mackeeper and gain a premium over Macshiny. They could also price lower, to undercut the competition or higher to market themselves as a premium product.

For new entrants to a market, a low price is a good way to gain market share rapidly versus the competition (even if it’s loss making or at cost). The risk is that the gamble doesn’t pay off, and either you don’t get the market share you expect to (with your low price) or you’re not able to monetize the customers that you capture initially with upsells or additional products.

To demonstrate value pricing, we’d hone on in the benefits of having a clean Mac and the peace of mind this would bring. To save users the hassle of deleting unwanted mail attachments from their email, as well as clearing out their iTunes of unneeded files. Hypothetically, they’d need to segment the ways people would use their software practically and what the main benefits would be.

MacPaw focuses in on the practicalities of what a clean Mac brings and how their product specifically goes about it. This allows them to choose a value-based price when charging their customers.

Value pricing is one of the best ways to price, because:

  • It’s product oriented and focussed on value delivered to the customer
  • Its flexibility enables A/B testing and optimisation
  • It’s dynamic, and enables bundling, bolt-ons, upgrades etc. to change the price as your product evolves

On the other hand cost-plus and competitor-based pricing are driven by constraints, either market constraints (your fixed costs) or competitor constraints (pricing what they’re pricing). Overall we’d recommend using value-based pricing to grow your business further, though this does require research on your customers to implement fully.

Keep reading more guides

Read the previous guide in the series:

Our pricing strategy guide

Read the next guide in the series:

How to Calculate and Implement Value Based Pricing

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