Software Pricing Hacks Use Relative Pricing to Nail Your Pricing Tiers

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Audio Transcript

Jim Geisman: The question becomes (especially if you’re embedding analytics and you’re coming out with a new product): How much should I charge for a series of products?

We use a technique called relative pricing that you may find valuable. It turns out as human beings we’re not very good at guessing at absolutes. But we’re pretty good at estimating relative values and while you may not be able to tell me how much that bag on the left costs you know that the bag on the right is probably more costly because it’s bigger and you can take a look at the things that are in there and kind of swag.

Well whatever price you might pay for the bag on the left you may wind up paying 50% or 30% or 100% or more for the bag on the right. Of course nobody sees that bottle of wine that’s sitting on the bottom of the bag that was minted back in 1938 and is worth thousands. But putting that aside, we’re much better at assessing relative values. So let me just show you how one can do that using prices that are already existing. First of all, again this is the salesforce model, you see the price points above and in essence what happens is there are prices that you are paying for different tiers. So the first tier sets out what the base price is, the second tier adds $40.00 worth of value, $60.00 in the third set of features and $175.00 in the final set of features.

“As human beings we’re not very good at guessing at absolutes. But we’re pretty good at estimating relative values.”Jim Geisman, Software Pricing Partners, LLC

So one way to do this relative pricing trick is to understand what the value add is of the incremental features of one of the products in your tiered offering. You can do that on a dollar basis, you can do it on a percentage basis, it really doesn’t matter. But I would suggest that however you do it you also do an exercise where you take a look at the percent of value that you are asking somebody to pay versus the percent of maximum price.

The reason for that is the maximum price and the percent of value (presumably that’s a 100%) and then everything else is below it.

You’ll notice that the three dots on the lower left: You get 40% of the value for roughly 10%t of the maximum price. 60% of the value for 20% and then if you doubled the value and you go from 20 to 40 you wind up adding another 20% in the terms of the price. But one of the things that’s interesting is that final delta of $175 is really 40% of the maximum price but you only get 20% of the features. By the way we calculated value is we just counted checkmarks. That’s not the way to do it, but that was just easy and convenient.

So you might ask yourself well why would I want to charge 40% more than the previous tier for only 20% of the value? That’s a pricing strategy. You may conclude that if somebody is at the higher tier and they’re going to trade up you have them hooked. Or you may take a look at the features and say you know those are really specialized features and we don’t sell a lot of them but the people that want those features in the offering don’t pay a premium. It should reflect a conscious decision.

“It’s a good exercise to take a look at the percent of value that you are asking somebody to pay versus the percent of maximum price.”Jim Geisman, Software Pricing Partners, LLC

So one way to do this relative pricing trick is to understand what the value add is of the incremental features of one of the products in your tiered offering. You can do that on a dollar basis or you can do it on a percentage basis–it really doesn’t matter. I would suggest that however you do it you also do an exercise where you take a look at the percent of value that you are asking somebody to pay, versus the percent of maximum price and the reason for that is the maximum price.

The percent of value presumably that’s 100% then everything else is below it, and you’ll notice that the three dots on the lower left you get 40% of the value for roughly 10% of the maximum price. Then 60% of the value for 20% and then if you double the value and you go from 20 to 40, you wind up adding another 20% in the terms of the price. One of the things that’s interesting is that final delta of $175 is really a 40% of the maximum price. But you only get 20% of the features.

The way we calculated value is we counted check marks. That’s not the way to do it, but that was just easy and convenient. So there so you might ask yourself well why would I want to charge 40% more than the previous tier for only 20% of the value, and that’s a pricing strategy. You may conclude that if somebody is at the higher tier and they’re going to trade up then you have them hooked. Or you may take a look at the features and you say those are really specialized features we don’t sell we don’t expect to sell a lot of them but the people that want those features in the offering don’t pay a premium and it reflects a conscious decision.

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Chris Mele

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Chris is a software monetization and pricing expert and former CEO of an award-winning SaaS company. An avid scuba diver, Chris should probably move closer to the beach.

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