How to price a product? The most popular pricing strategies | Product management #18

How to price a product?

The process of developing an MVP has come to an end. Now, it might seem like the creators of the digital product just have some final preparations before its launch. However, they are also busy deciding how to price the product so the company can start making money before its fully developed. But where to even begin when it comes to figuring out the right pricing strategy?

Pricing physical vs digital products

First, it’s worth pointing out the unique value proposition of the digital product. However, when talking about all digital products, such as apps and software, it should be noted that, as a whole, they also have unique characteristics which affect their prices. For example, production costs are often much lower than in the case of physical products. Understanding these differences is essential when developing an effective pricing strategy for digital products. Here are some of them:

• Scalability – digital products are easily scalable without incurring extra costs. For example, once created, a mobile app can be sold to an unlimited number of customers.
• Low production costs – the cost of producing an additional unit of a digital product is marginal. In the case of an e-book, the cost of producing another copy is almost zero.
• Data value – digital products often generate value through data collection and analysis. For example, a fitness app can collect data on user activity and provide personalized recommendations.

Considering the unique features of digital products is key to developing an effective pricing strategy. For example, producing digital products is much cheaper than producing physical products. However, maintaining them can generate costs that are comparable to production costs.

Examples of pricing strategies

What pricing strategies can be adopted for digital products? Let’s take a look at some of them tested by many companies. Choosing the right strategy depends primarily on the characteristics of the product, the market, and the target audience.

• Value-based pricing – involves setting the price based on the value that the product delivers to customers. For example, Adobe Creative Cloud offers different pricing packages depending on the set of tools and features that users want to use, customizing the offer.
• Cost-plus pricing – setting the price based on production costs and adding a profit margin. For example, a company that sells e-books might set the price based on the time and resources required to write the book, plus a margin that ensures profit.
• Dynamic pricing – flexible pricing depending on demand and other market factors. For example, Uber uses dynamic pricing, where ride prices and rates change depending on demand, which allows them to adapt fares to both drivers and passengers.

Choosing the right pricing strategy is crucial as it allows companies to align their earnings not only with the cost of software development but also with demand. It is important to remember that pricing digital products may require a more flexible approach than traditional products.

Pricing models in digital ecosystems

In digital ecosystems, such as platforms and networks, pricing models can be more complex. Here are some examples:

• Subscription – Adobe Creative Cloud offers subscription models, where customers pay a monthly fee for access to the suite of tools, which allows them to use the latest features.
• Pay-per-use – i.e., paying only for the features actually used. For example, Amazon Web Services offers subscription-based pricing, where customers pay only for the resources they use, which enables scalability and flexibility.

It is worth noting that pricing models in digital ecosystems often focus on delivering value on an ongoing basis, rather than on a one-time basis. Therefore, product pricing in digital ecosystems is often based on the value the product delivers to customers in the long run.

Biggest pricing challenges

One of the pricing challenges you may face is setting a price for a digital product that doesn’t reflect its value. A good example can be a startup that launches an innovative app and sets its price too low. As a result, the company may not be able to cover the costs of developing and maintaining the app. And the low price may make customers think that the product is of poor quality. In such a case, it’s worthwhile to conduct an in-depth market analysis and understand customer expectations, as well as what benefits the product brings, to set a price that reflects its value.

Another challenge you may encounter is adjusting the price of a digital product to changing market conditions. A great example could be a company that offers subscription-based pricing and has to compete with other providers of similar services. In such a case, the company may have to lower its price to retain customers, which could negatively affect its profitability. In such a scenario, it makes sense to use a dynamic pricing strategy.

An additional challenge that you may come across is avoiding mental traps when pricing digital products. A perfect example could be a company that sets the price of a product based on its production costs or their subjective assessment. As a result, the company may fail to consider how customers perceive the product and how much they are willing to pay for it. In such a situation, it’s worth using a value-based pricing strategy and testing various price levels to find the optimal price.

How to price a product – summary

Pricing digital products is not just a science, but an art. Understanding the unique features of digital products, choosing the right pricing strategy, and considering the impact of pricing on customer perception are key elements of success. Budding entrepreneurs should focus on delivering value and be flexible in their approach to pricing. Remember that pricing digital products is not a one-time activity, but a process that requires constant attention and flexibility.

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