Review

A crucial aspect of product management is balancing value exchange between users and the business. While responsibility for pricing may be ambiguous, all Product Managers should be adept at discussing pricing strategies and evolving business models. This tiny book covers some of the basic fundamental of software pricing.

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The Art of Pricing

One of the better books on pricing. The key insight is that customers can value the same product differently, and you can uncover hidden profits by understanding what your customers value and introducing different price points and offerings to capture their demand. I love that this approach takes the pressure off defining a single "magic price" that maximizes profit. However, the author didn't discuss how to mitigate showing or communicating the inevitably more complicated product-price offerings—to me, that's a significant oversight.

andrewclark.co.uk

Build Better Products

It's clear why this book receives great reviews—it's a well-structured, jargon-free, practical guide to product discovery. For product managers looking to enhance their discovery skills, this is one of the better resources available. While it doesn't offer many groundbreaking revelations, it provides a solid foundation in product discovery.

andrewclark.co.uk

Monetising Innovation

The key insight of this book resonated strongly with me: pricing and customer value should be placed at the beginning of the innovation process, not the end. The book challenges traditional product-first thinking, instead advocating for starting with market needs and price points to create solutions customers truly value. This is a critical message for product managers - it's too easy to postpone pricing discussions until the end of the process, by which time it's likely too late.

andrewclark.co.uk

Key Takeaways

The 20% that gave me 80% of the value.

The area under a demand curve (price x quantity sold) represents revenue. The goal is to find a price point where the combination of sales volume and price yields the highest revenue. Finding this optimal point requires careful experimentation and analysis of market behaviour.

The shape of the demand curve varies based on several factors—competitor pricing, customer types, and the market environment. Understanding these variables helps in identifying how sensitive demand is to price changes, which is essential for optimising revenue.

Objective Value vs Perceived Value:

• Objective Value the objective value of a product is what it delivers in economic or functional terms. If a product saves you 3 hours of work - and you value your time at $50 an hour - it has an objective value of $150. It’s what a ‘rational homo economicus’ would value the product at. But normal people aren’t like that.
• Perceived Value: A perceived value is how much a customer thinks it is worth. The actual value as perceived by the purchaser might be higher or lower than objective value. It might be easier to change a persons perceived value - than the objective value a product provides. You can change perceptions through marketing and positioning without changing the product.

People don’t decide on value in a vacuum. There are many factors that affect pricing perception:

• Reference points - (e.g., competitors' pricing)
• Brand Strength
• Customer knowledge (e.g. know computers and you know 8GB of RAM is better than 4)
• Cultural & taste factors
• How much money somebody has.

Strategies to increase perceived value:

• Increase its objective value (e.g. better performance or added features)
• Give the product a personality - win on something like simplicity or aesthetics
• Become an expert or associate your product with an an expert to build credibility
• Create a tribe - build a sense of community
• Promote loyalty through excellent customer service
• Remind people how much work has gone into your product
• Sell the experience not the product.

Try to differentiate your product from others. If you have competitors your customers will be more conscious of cost - but if your product creates a new category - then you can escape that.

Pricing Stragies:

• Versioning: Offering multiple versions of the same product allows companies to segment customers based on their willingness to pay.
• Methods of Versioning: You can version products by feature set, availability, geography, , demographic, industry, or platform. For example, a stripped-down version might be offered for students at a lower price point, while a full-featured version targets enterprises.
• Bundling: Bundling is a tactic where multiple products are sold together at a discounted price, which can appeal to customers seeking better value. Bundling often works well because it increases the perceived value of each product within the bundle. However, bundling must be handled carefully to avoid devaluing individual components.
• Multi-user Licenses and Site Licenses: Multi-user licenses offer volume discounts to businesses, making the product accessible to larger teams. Clear definitions for site licenses (e.g., defining if they are for a single office or multiple locations) are essential to avoid losing potential revenue.
• Free Trials let customers try out software for free - this can cement their perception of value and make them more likely to purchase. Free trials work best for product you use regularly.
• When your product has strong network effects - having some sort of free version to drive adoption is generally a good idea.
• Pricing for SaaS: In a Software as a Service (SaaS) model, pricing involves recurring payments. This model is attractive because it allows lower initial costs for customers, increasing adoption rates. However, companies must be careful with cost recovery and retention metrics to ensure profitability.
• Pricing tiers should become more expensive with usage or value provided to the customer. So find a good understandable proxy for value that the customer can easily understand.

Product Pricing Checklist

• Strategy: Decide between low-price, high-volume or high-price, low-volume. Ensure alignment with brand, product, and desired image.
• Product: Consider the entire package, not just the software itself.
• Pricing Fairness: Understand customer reference points and how they'll judge your pricing.
• Customer Analysis: Know their business, financial capacity, and preferred payment models.
• Competitor Assessment: Evaluate their pricing, business model, and potential reactions to your pricing.
• Sales Approach: Determine sales method (e.g., in-person, online) and associated costs.
• Customer Segmentation: Explore versioning options based on customer types or needs.
• Bundling Opportunities: Consider creating larger packages with multiple products.
• Initial Pricing: Make an informed guess to start with, as some price is better than no price.

Deep Summary

Longer form notes, typically condensed, reworded and de-duplicated.

Chapter 1: Economics

In microeconomics - the demand curve shows how pricing directly influences customer demand. Price is plotted against the number of units customers are willing to buy. This curve helps understand how changing prices can influence sales volumes.

Demand Curve:

The area under the curve (price x quantity sold) is the revenue of all the sales. We want to find the point on the demand curve that has the greatest revenue.

At $0, the maximum number of customers will acquire it, but there is no revenue. As the price increases to $100, the number of customers drops, but revenue is generated. The key is to find a price that maximises the area under the curve, i.e., the total revenue.

The relationship becomes more clear if we plot revenue vs price.

The goal is to find a price point where the combination of sales volume and price yields the highest revenue. Finding this optimal point requires careful experimentation and analysis of market behaviour.

The shape of the demand curve varies based on several factors—competitor pricing, customer types, and the market environment. Understanding these variables helps in identifying how sensitive demand is to price changes, which is essential for optimising revenue.

Chapter 2: Pricing Psychology

You need to understand what your product means to customers. Your customers think of your product as more than software. Your brand stands for something, as do your future promises. You’re customers are also purchasing soft factors like reassurance, familiarity, support, reliability etc.

Objective Value vs Perceived Value:

• Objective Value the objective value of a product is what it delivers in economic or functional terms. If a product saves you 3 hours of work - and you value your time at $50 an hour - it has an objective value of $150. It’s what a ‘rational homo economicus’ would value the product at. But normal people aren’t like that.
• Perceived Value: A perceived value is how much a customer thinks it is worth. The actual value as perceived by the purchaser might be higher or lower than objective value. It might be easier to change a persons perceived value - than the objective value a product provides. You can change perceptions through marketing and positioning without changing the product.

People don’t decide on value in a vacuum. There are many factors that affect pricing perception:

• Reference points - (e.g., competitors' pricing)
• Brand Strength
• Customer knowledge (e.g. know computers and you know 8GB of RAM is better than 4)
• Cultural & taste factors
• How much money somebody has.

Try to differentiate your product from others. If you have competitors your customers will be more conscious of cost - but if your product creates a new category - then you can escape that.

Chapter 3: Common Pitfalls

• Competitor Reactions: Competitors often react aggressively when prices are set too low, which can lead to destructive price wars. The airline industry provides an example where new entrants attempted to compete on price, resulting in unsustainable losses for all players involved.
• Fair Pricing: Fairness matters. Consumers have an innate sense of fairness, which can impact their purchasing decisions. Misaligned pricing—such as charging a high price for a digital book comparable to a printed one—can drive customers away.
• Piracy: Setting prices too high can make piracy more appealing to potential customers. Pirates can also be seen as an indicator of unmet demand. Addressing the reasons for piracy—like reducing excessive prices or making your product more accessible—can convert pirates into paying customers.
• Switching Costs: When customers consider switching from a competitor's product, they face both economic (e.g., costs to convert data) and psychological costs (e.g., losing familiarity with an existing tool). Overcoming these barriers may require competitive pricing and added incentives, such as free trials or migration support.

Chapter 4: Advanced Pricing Strategies

• Versioning: Offering multiple versions of the same product allows companies to segment customers based on their willingness to pay.
• Methods of Versioning: You can version products by feature set, availability, geography, , demographic, industry, or platform. For example, a stripped-down version might be offered for students at a lower price point, while a full-featured version targets enterprises.
• Bundling: Bundling is a tactic where multiple products are sold together at a discounted price, which can appeal to customers seeking better value. Bundling often works well because it increases the perceived value of each product within the bundle. However, bundling must be handled carefully to avoid devaluing individual components.
• Multi-user Licenses and Site Licenses: Multi-user licenses offer volume discounts to businesses, making the product accessible to larger teams. Clear definitions for site licenses (e.g., defining if they are for a single office or multiple locations) are essential to avoid losing potential revenue.
• Free Trials let customers try out software for free - this can cement their perception of value and make them more likely to purchase. Free trials work best for product you use regularly.
• When your product has strong network effects - having some sort of free version to drive adoption is generally a good idea.
• Pricing for SaaS: In a Software as a Service (SaaS) model, pricing involves recurring payments. This model is attractive because it allows lower initial costs for customers, increasing adoption rates. However, companies must be careful with cost recovery and retention metrics to ensure profitability.
• Pricing tiers should become more expensive with usage or value provided to the customer. So find a good understandable proxy for value that the customer can easily understand.

Chapter 5: Pricing Perception

Pricing as Practice: Setting the right price is an iterative process. Companies should collect feedback and test various price points to understand what resonates with customers. Price adjustments should be made carefully, as changes can affect customer perception and loyalty.

Price Anchoring: Presenting customers with different pricing options can help establish a reference point, guiding them toward the desired option. For example, offering a premium product alongside a standard one makes the latter appear as better value.

Changing Prices: Changing a product’s established price can be challenging. Raising prices must be justified by improvements or additions to the product to ensure customers continue to see value. Price changes should be made cautiously and communicated transparently to customers.

Chapter 6: Product Pricing Checklist

What's your strategy?

Are you going to price low and sell lots, or price high and sell a few? How does this fit into your brand, the product you have and the image you want to project?

What's your product?

Don't forget that it's not just the software that you're selling. It's the entire package around it.

How will your customers judge the fairness of your pricing?

What reference points will they use? How will they determine what seems right? Will they baulk at the price you choose, or will they accept it?

Who are your customers?

How does their business work, and how do they expect to be charged? How much money do they have? Do they prefer a one-off fee, or a monthly subscription? Get under their skin.

Who are your competitors?

How will they react to your pricing? How much more, or less, valuable is your product than theirs? What is their business model? What are their prices? If you undercut them, will you trigger a price war? If you do, are your pockets deep enough for you to win it? Do you want to co-exist with your competitors, or destroy them?

How are you going to sell your software?

Do you need to send out sales people to take customers golfing? Or are you planning low-touch sales over the internet? Will you require a telesales team? How much will each sale cost you? Do you need to sell via a channel or reseller? What cut will they take?

Can you segment your customers, and create versions?

Is your software worth different amounts to different people, and can you create pricing that reflects that? Students and business people for example, or normal and power users, or maybe you can split by geography or taste.

How can you bundle your software?

Can you create a larger package that contains more than one software product?

Make an informed guess at your price

Despite all the psychology and economics, you ultimately just have to pick a price. Some price – any price – is better than no price.