Product Pricing Strategies: Choosing the Right Approach for You

Choosing your product pricing strategies is a fine science. There’s far more to it than throwing pricing models at a wall and seeing what sticks. There are a lot of factors you need to think about, and a detailed process to follow. 

You don’t want to be the Product Manager that gets your product pricing strategies wrong. A price that’s too low leaves money on the table, and one that’s too high puts potential users off. It’s like Goldilocks and the Three Bears, you want a pricing model that sits just right. That satisfies your customers like a perfect temperature bowl of porridge. 

If you’ve been guilty of pricing your product similarly to your competitors and calling it a day, it’s time to dig a bit deeper into your product pricing strategy.

Now pricing strategies are firmly in the business management world, and if you open up a textbook you’ll find A LOT of different strategies, theories, and more. We’re going to focus on pricing strategy from a Product Manager’s perspective, making sure you know how to translate the business theory into practical action for your own product pricing.

If you want advice from one SaaS PM to another, check out our article below with insight from ProdPad Co-founder, Janna Bastow 🔽:

What are product pricing strategies? 

A product pricing strategy is the overarching plan for how a company prices its products or services. Think of it as the philosophy that dictates how you’re setting your price. It’s the why behind the specific pricing model you choose to run.

See, you want to give your pricing some thought. It’s not enough to just look at what your competitors are pricing and pitch your product somewhere around there. You may as well be throwing darts with your eyes closed and charging whatever number it hits. Your pricing needs to be considered. This is what a product pricing strategy allows you to do. 

There are multiple strategies you can adopt, and you can jump between them all based on various factors and influences. Things like your positioning, competitors, market, and business goals will reflect what pricing strategy works for you. 

What’s the difference between product pricing strategies and pricing models?

This is something that you don’t want to mix up. A pricing strategy and a pricing model are not the same thing. If product pricing strategies are the why, then the models are the how. They’re the specific methods you’ll adopt when setting up your pricing. 

A pricing strategy is more conceptual and broad, whereas a pricing model is the specific details of what you’ll be doing. Your product pricing strategy will feed into what model you choose to deploy.  

Some popular pricing models include:

• Freemium pricing: Freemium pricing offers a basic version of a product for free to attract users while generating revenue from those who pay for premium features. Freemium is increasingly linked to the reverse trial. 
• Tiered pricing: Tiered pricing provides different product versions or service levels at varying price points, catering to different customer segments. 
• Flat-rate pricing: Flat-rate pricing involves charging a single price, either as a one-time purchase or a recurring subscription, for a product that performs a few key functions exceptionally well. 

What are the different product pricing strategies? 

You’ve got a whole host of different product pricing strategies to choose from. They all have ideal use cases and can suit various types of businesses and products. When looking at pricing strategies, you’ll find that three main ones are often talked about the most. These are the top-dog pricing strategies that the majority of products will gravitate towards. These are:

1. Competitive based pricing 
2. Value-based pricing
3. Cost-plus pricing 

Here’s a closer look at these three to help you identify the best one for you. 

Competitive based product pricing strategies

This product pricing strategy is where your price points are most heavily influenced by your competitors. When following this product pricing strategy, you’re placing more value on the outward market instead of looking inward at your costs. 

This pricing strategy is best used when you offer similar products or services to your competitors. Following this pricing strategy can lead you to three main approaches to try. 

1. Lowest cost offering: When basing your pricing on competitors, you can choose to position yourself as the lowest cost offering, undercutting the other prices in the market. This strategy can make you more attractive to customers, but you need to be careful that you don’t cut into your profit margins too much. You should also have a plan in place to eventually move customers to a higher profit option. 

2. Premium price points: With this approach, you can choose to charge more than your competitors to hopefully stand out as a luxury, higher-quality option. You’ll need a strong brand to pull this off and a killer product that offers higher value than your competitors. 

3. Price match: Your third option is to price match with your competitors. Here you guarantee that your product will be the same as a competitor. This can be risky as your cost base may not be the same as those you match, and it really only works best if you have multiple products to sell. 

There are many advantages to using competitive based pricing. Customers won’t be surprised by how much you charge, and you will instantly be seen as a viable option by customers. It’s also a very quick approach to pricing, and by piggybacking off your competitor’s pricing you can benefit from their market research without having to do too much yourself. 

The drawback is that you’re heavily pressured by your competitors. If they change, you’ll need to react. Plus, by following this product pricing strategy, your profit is at risk as you may have a higher cost base.

Value-based product pricing strategies

Value-based product pricing strategies involve looking at your customers to price your product based on how valuable they find it. This is all focused on customer perception, so you need to have a drilled-in knowledge of your target market and audience. This is where collecting customer feedback, creating user personas, and more come into play. 

This is a tough pricing strategy to get right, which is why many opt for alternatives. But if you stick at it, you’ll get rewarded. 

You need to research your customers and find out what problems your product can solve for them and the monetary benefit your service brings. This can then guide your pricing, in addition to further testing and experimentation. 

One great benefit of this pricing strategy is that you can charge a higher price as long as you get your value proposition right. You also build a deeper understanding of the market and your customers due to all the research involved, which can help you make a better product. 

It is time-intensive and not a quick win, and not all your customers will agree on a perceived value. It’s one of the hardest pricing strategies to adopt, but one that’s worth the challenge. 

Because, if you are confident you have a highly valuable product – one that customers perceive as such – then you can set a price to reflect that importance. Value-based product pricing is where the highest profits can potentially be realized. When a product is high-value, often price sensitivity is less of an issue and you can price based on the perceived value rather than your competitor’s pricing or even your own cost base. 

Which brings us onto the subject of your cost base…

Cost-plus product pricing strategies

The good news is that cost-plus pricing is perhaps one of the easiest to wrap your head around. With this strategy, you’re simply choosing how much extra you want to charge for your product based on the costs to develop it. 

For example, if you sold TVs, cost-plus pricing is deciding that you want to sell the TVs for 30% more than it costs to make them. This ensures that for every item sold, you’re getting a profit of however much extra you’re charging for them. 

But how do you decide how much extra you want to charge on your costs? Well, that’s just down to how much profit you want to make on each item. Of course, there’s a caveat to that. Everyone wants to make a gazillion percent profit margin, but customers aren’t going to pay a gazillion dollars. You need to set a cost-plus price that’s fair and that somewhat resembles the wider market. And to do that: pull in some competitive based principles. 

One of the hardest parts of cost-plus pricing is working out your cost per unit. You need to consider everything that goes into building your product and getting it out there. It’s not just development and manufacturing costs, it’s marketing, salaries, and office rent. If you don’t consider everything, you may price your product at a point where you still make a loss. 

Now, cost-plus pricing isn’t going to work for every Product Manager. It’s primarily used by those selling physical products who want to keep things simple. It’s not really ideal for those looking to maximize profits. The truth is that for most Product Managers, this would be the wrong strategy to take. A better pricing strategy needs to factor in customers and competitors, which is why the alternatives are often preferred. 

Alternative product pricing strategies 

Although we’ve just talked about the big three strategies, there are other options you can consider or incorporate into your decision-making.

One of the more well-known options is the are Kotler’s pricing strategies: 

If you want to really get your business theory geek on over your pricing strategies, you can take a look at Kotler’s pricing strategies. Philip Kotler is part of the business management theory old guard and his matrix of pricing strategies is worth reading up on. 

In a nutshell, his matrix helps you plot your product based on price and quality to see if you’re offering a service that’s premium, economy, a rip-off, or superb-value to name a few.

 Here are some other options that may be worthwhile looking into. 

• Dynamic pricing strategies: Dynamic pricing follows market trends, user demand, and rates and adjusts the cost to the end customer to match. The aim here is to pick a profit margin percentage and alter costs to always stay just above that rate. 
• Penetration pricing strategies: Penetration pricing allows you to break into the market by offering your product at a much cheaper price than the competition. That might be through stunt pricing that lasts a short while, or, more commonly, via lengthy free trials. 
• Price skimming strategies: Here, you can set your price as high as you like on the assumption that a small number of early adopters will happily pay for your product. This allows you to slowly reduce the cost to the end user as more and more competitors emerge.

So which product pricing strategy is the best? 

We can’t tell you that. There’s no one-size-fits-all product pricing strategy. If there was, there’d be no need for this article, as everyone would just use the same one. Now in most cases, some make more sense than others, with value-based pricing being the general favorite. However, you shouldn’t just blindly follow that. 

You see, the best pricing strategy depends on so many different factors and the unique quirks of your business. One strategy will be great for one company but absolutely suck for another. 

So how do you find the best product pricing strategy for you? That my Product Manager friend, is a much better question. When deciding which strategy suits you best, you need to consider quite a few things to ensure it aligns with your needs. Here are some things to think about: 

Your business goals

What are your overall business goals? What do you want your product to achieve, in both the long and short term? If you’re keen to quickly gain market share, then a strategy like penetration pricing may work best. If you’re hoping to maximize profit over the long term, then a different strategy like skimming pricing would be better. 

Your pricing strategy is also dictated by your brand positioning and where you want to sit in the market. If you’re looking to be seen as a premium, luxury brand, you need a pricing strategy that reflects that. 

Looking to better define your business goals? We’ve got you covered with the ultimate collection of ready-made OKRs to boost your goal-setting. Download below 👇:

Your market and competition

To nail the right product pricing strategy, you need a good grasp of your market demand. If you’re in a highly competitive space with multiple alternatives for customers to go to, you’ll benefit from a competition-based pricing strategy. 

Now we did say that you don’t just want to do what your competitors are doing, but it is good to research what they’re charging and have that influence your decision-making. It can help ensure that you’re charging alongside industry standards and allows you to decide if you want to match, exceed, or undercut these prices based on your value proposition. 

Your customers 

Your audience and the different segments that make up your user base and target market will massively dictate which pricing strategy is best for you. Different customer types have different needs and value different things. This means that they’ll be willing to pay different prices for your services. This makes value-based pricing pretty effective as long as you deeply understand what each customer segment is willing to pay. 

That said, if through customer research you learn that your users are sensitive to price changes, then other strategies may be better suited to you. 

Your cost structure 

When choosing your product pricing strategy you should always have an eye on your costs, as you need to make sure your strategy covers your expenses and still delivers a profit. Depending on your costs, you may not be suited to economic pricing strategies as it may result in a lower profit. 

To ensure you’re factoring in cost, you can always choose a cost-plus pricing strategy, and build it by determining the minimum margin you need to sustain your business. 

Your competitive advantage 

Got something unique about your product that your competitors can’t match? That can open you up to value-based pricing, where you’ll be able to charge a premium because your product blows your competitors out of the water. Having a Unique Selling Point (USP) gives you more freedom over your pricing strategy. 

Plus, if you’re an established business in your market with strong brand loyalty from your customers, you’re in a much better position to sustain a premium pricing strategy over time. 

When should you change your product pricing strategy? 

Here’s the tea. Many Product Managers fall into the trap of not experimenting with their pricing often enough. It’s been said by Patrick Campbell, a product pricing expert, that businesses only alter their prices every 3 years. He believes that this is too infrequent and that PMs should look at altering their prices every three to six months. The numbers back this up:

We get it. Changing your pricing often seems scary. But think about it this way. As a Product Manager, you’re changing, updating, and innovating your product constantly. With new features and releases, you’re always tinkering away at your product to make it the best it can be. Why not your pricing too? 

Now before you take this to the extreme and start changing things drastically, the iterations don’t have to be that big. Big changes can be disruptive. Say you’re a customer on a tiered pricing model. You don’t want to be dealing with prices that change with the seasons. Instead, you can look to make changes by introducing a new tier and get people to upgrade, or by introducing a related plan with a slightly higher value metric and price. This little-by-little approach to changing your product pricing strategies ensures that you’re constantly evolving. 

What if I don’t want to change my product pricing strategy that often?

If you’re still dead set against making regular changes to your pricing strategy, there are some signs that you should look out for that indicate that a pricing strategy switch-up should be on the cards. Of course, some of these are obvious. 

If your bills and expenses start to increase, and your profit line starts to fall, then it’s time to think about making changes. Keep an eye on customer churn to see if customers are leaving because of misaligned prices. Plus, if you notice that your competitors are charging prices that don’t align with yours, then you will need to update. 

But a less obvious indication that your pricing strategy isn’t working is when you’re getting customers to sign up without any questions or pushback. Hold on. Are we really telling you that people buying your product no questions asked is a bad thing? Well, yeah. 

See if your product is selling like hotcakes, and customers are gleefully accepting your pricing terms, it may be an indication that you’re charging too little. Your value proposition may be hugely exceeding the price you’re charging. This is potentially leaving money on the table. 

Say you’re a super popular band about to sell tickets for a world tour, and just 10 minutes after tickets got released, you sold out. On the surface, that looks awesome. But if you think about it, you could have made a lot more money if you sold the tickets for a bit more.

As a Product Manager, you want to find a pricing strategy where most people are still just about willing to pay for your product. Of course, you don’t want to be in a situation where no one is buying and everyone is begging for a discount. However, having some pushback on your prices while maintaining consistent customer acquisition indicates that your prices are better than if you’re selling them without issues. 

How should you implement new product pricing strategies?

A change in pricing can be difficult to oversee. You don’t want to rush it and upset existing customers by suddenly changing things without them expecting it. You want to go about your business in a proper way. Here are a few things to keep in mind. 

Communicate the change effectively

When changing your prices, you need to make sure that everyone knows what’s up. Open up communication with your current customers so that they’re fully aware of what you’re doing. Don’t apologize for a price change, but instead treat it as an opportunity. Offering a new tier to your product that’s a bit more pricey? Let them know and make it sound too valuable to ignore. This transparency is key. 

But also don’t forget about internal communication. You definitely want Sales and Marketing Teams to be clued in so that they’re not quoting old, outdated prices or models. Keep all stakeholders informed of changes and the rationale behind them. 

Monitor and adjust

When you change your pricing strategy, don’t feel like you have to stick it out if it’s not working. You’re free to tweak and revert if that’s the best thing for your product. This flexibility will allow you to be agile and change your prices so that it’s better for you and your customers. Track the performance of your product after the price change, looking out for things like user activation, to see if there’s a dip you need to address. 

Be sure to also monitor the KPIs you’ve decided at the start of your product strategy, as this will make it clear if your product is maintaining success with the new prices. If you’re struggling to decide KPIs for your product, we’ve got a list of all the options to choose from that you can steal if needed. Download it below ⤵️: 

Get customer feedback 

When you change prices, be sure to maintain your customer feedback loop, so that insight can be used to guide further changes and innovation. Actively seek the thoughts of your customers about the new pricing. Do they think it’s fair? Do they like the new model that you’ve adopted? This process ensures that you’re making good changes for your users.

Prepare for pushback

A significant change to your product pricing strategies and model may result in some resistance from customers. If your strategy has made you go from a one-off payment to a subscription-based model, that change could be pretty jarring and cause dissatisfaction. 

Make sure to have a plan in place to deal with these objections. You can sweeten the deal by offering discounts and promotions to ease customers into your new way of pricing. 

But it’s not just customers you need to think about. Your competitors may also react to your new product pricing strategy, so you’ll want to keep a close eye on the market to see if they respond and change their tactics. This may force you to make further changes down the road to keep up. 

What happens if you get your product pricing strategy wrong?

We’re not going to fearmonger and say that getting your product pricing strategy wrong is going to ruin your company. If you notice quickly enough that things are wrong, you can pivot and start to recover. 

That said, there are some consequences that you want to avoid, which is why it’s useful to inspect and monitor your pricing regularly so that you can tweak it when needed. 

The biggest issue is that you leave money on the table. If your pricing is too low and people are snapping up your product, then you’re missing out on more money that could have been made. On the flip side, if you go too far the other way, you may put customers off from buying from you. 

Both of these situations can lead to a low profit margin, which can make things pretty dicey if not sorted out quickly. 

Getting your product pricing wrong can also affect how the market views you. If you’re using a product pricing strategy that undercuts your competitors and that is constantly running sales or discounts, you can dilute the value of your brand. Customers may start to see your product as low quality, even if it isn’t. This forces you into a corner in terms of product positioning. No one is going to buy that it’s a premium option if they’ve already built up a conflicting perception in their head. 

If you’re keen to learn more about product positioning, we’ve got an awesome on-demand webinar with the even more awesome April Dunford. She’s a product positioning expert, so it’s worth checking out the webinar below ↘️: 

In summary, a poor pricing strategy is a missed opportunity. You’ll be sacrificing potential income and giving up some customers to your competitors who would have loved your product. All this can harm you in the long run, so be confident to switch things up when needed. 

A product pricing strategy you can bank on

Choosing the right pricing strategy can feel like trying to hit a moving target. It’s a mix of understanding your market, knowing your customers, and keeping an eye on your costs, all while trying to squeeze out a profit. 

Whether you’re using competitive based, value-based, or cost-plus pricing, the key is to keep experimenting and adjusting. After all, even the most seasoned Product Managers need to tweak their strategies to stay ahead. And speaking of staying ahead, why not use a tool that’s as flexible as your pricing needs to be? 

With ProdPad, you can manage your entire product roadmap in the Now-Next-Later framework, track customer feedback, and highlight recurring ideas to find out what you should be working on next. Why not take it for a test drive? Sign up for a free trial today and see how ProdPad can help you.