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  • #08: The Secret to Setting the Right Price

#08: The Secret to Setting the Right Price

Pricing and packaging is one of the most controversial activities at a company. Almost everyone wants a say in how a product gets priced, but no one wants to be responsible for owning the decision or completing the work.

And I get it.

If you price a product too low, you could be leaving money on the table and hindering your revenue growth potential.

If you price a product too high, you may be turning away potentially high value customers, risk an increase in churn or see a decline in acquisition growth.

To make matters worse, pricing decisions in most organizations are often made based on opinion or intuition. How often have you sat in a meeting and heard, “I just don’t think customers would pay for this” or “Just put it in every package”?

Luckily, setting the right price doesn’t have to be as challenging as it sounds. Today I’m going to share the tool that allows my product marketing team to show up at the table with a customer-first data point every time pricing is up for discussion.

Calling Mr. Van Westendorp

The best pricing conversations aren’t centred on your executive team’s gut instinct about the market, but rather around the concept of willingness to pay - essentially, the dollar amount a customer is willing to pay for your product or service.

Now, the trick to assessing willingness to pay is that you can’t actually trust what your customer says. Hear me out.

Imagine you ask your customer or prospect, “how much would you pay for my product or service?” The answer just won’t be useful, or even truthful. Everyone wants a deal, and so even if a customer would be willing to pay more, they are going to give you a lowball answer to try to save money.

This is where the Van Westendorp price sensitivity meter comes in.

First introduced in the 1970s by an economist, it continues to be a popular method to assess willingness to pay due to its simplicity in both questions and application. As a PMM, you can run the survey and analyze the results yourself in just a few days.

The Van Westendorp asks four simple questions that get at the heart of what a customer is willing to pay, without outright asking them.

The four questions are:

  1. At what price would this product be so expensive that you would not consider buying it?

  2. At what price would it be just getting expensive, but you would still consider buying?

  3. At what price would it be a bargain and a great deal for the price?

  4. At what price would it be so cheap that you would actually be worried about the quality?

You’ll need to run a survey to your target customer segment in order to get the volume of results you need to reach statistical significance. Once you have the data inputs, you’ll turn the raw data into a chart (like the one below) that will highlight your optimal pricing band.

The optimal pricing band (that gray band) is essentially the range that would be considered acceptable and optimal to price your product - it will neither be too high nor too low. Think about it as the goldilocks of price point - it’s just right!

Once you have the optimal price range for your product, you can start to have some interesting business discussions. Do you want to optimize for increased demand and adoption? You may want to price on the low end of the band. Would you rather optimize for revenue, at the expense of customer count? The higher end of the band might be better for you.

These tradeoff decisions will really depend on a variety of factors like your business model, the market you’re operating in, and any previous strategic decisions set by the organization. But, at least now, instead of coming to the table with an opinion, you have a data-backed insight that can help guide a strategic conversation.

Segment for Success

Like a good GPT prompt, the quality of the input will determine the quality of the output.

If you run a Van Westendorp on a general set of customers, you’re not going to get very crisp results. That’s why I always recommend that you apply customer segmentation to this pricing exercise, as there will be nuances in how much each segment is willing to pay.

Whenever I speak about the power of segmentation and pricing, I love to show this chart that breaks down Shopify’s willingness to pay study from Profitwell.

We can see that willingness to pay for their first four customer segments increase fairly incrementally. If Shopify had assumed the same logic to back their way into a price point for their fifth customer segment, they would have certainly left money on the table. But, by completing proper willingness to pay research this company was able to discover that the fifth segment was actually willing to pay substantially more for the product than the first four segments.

This doesn’t meant that you have to run five separate pricing studies. You can send a survey once, but just make sure that you have the ability to segment the data afterwards in order to get the level of granularity you need.

That’s it for today - can’t wait to hear about how you’ll apply the Van Westendorp to a future product launch. Shoot me a DM and let me know if it empowered you to have a stronger voice at the pricing table.