design-pricing-strategy

Design Pricing Strategy

Build a defensible pricing strategy grounded in customer value, competitive position, and business model objectives.

Why This Is Best Practice

Adopted by: Simon-Kucher & Partners (world's largest pricing consultancy, 1,600 consultants); McKinsey Pricing Practice; SaaS companies including Salesforce, HubSpot, and Slack Impact: McKinsey research shows a 1% improvement in price realization yields an average 8.7% improvement in operating profit — more leverage than a 1% reduction in variable costs (5.1%) or a 1% volume increase (3.3%).

Why best: Pricing is the most underleveraged profit lever because founders and product managers default to cost-plus or competitor-matching, both of which leave significant value on the table. Value-based pricing captures the actual economic benefit delivered to the customer, which is typically 5–10× the cost to deliver.

Steps

1. Quantify customer value delivered — Calculate the economic value to the customer (EVC): what does your product save or earn for a typical customer? EVC = (revenue gain or cost savings attributable to your product) over the relevant time horizon.
2. Segment customers by willingness to pay — Different customer segments have different WTP; identify 2–4 segments with meaningfully different value profiles and design pricing tiers accordingly.
3. Run Van Westendorp Price Sensitivity Meter — Survey target customers with four questions: too cheap, cheap, expensive, too expensive; identify the acceptable price range and optimal price point from the distribution.
4. Benchmark competitor pricing — Map direct and indirect competitors on a value-vs.-price matrix; identify where you are positioned and where you want to be (premium, parity, or penetration).
5. Choose a pricing model — Select from: per-seat, usage-based, outcome-based, freemium + upgrade, tiered packages; choose the model that best aligns your revenue capture with the value metric customers care about most.
6. Design packaging and tiers — Create 3 packages (good-better-best); design the middle tier as the target; use anchoring (high-priced tier) to make the middle tier feel reasonable; include a clear upgrade trigger.
7. Set discounting policy — Define maximum discount levels by deal size and approval authority; discounting > 20% should require VP approval; log all discounts to track erosion.
8. Test and iterate — Run A/B price tests with new prospects; measure win rate, deal size, and payback period; raise prices until win rate drops below 20–25% (sign of underpricing if win rate is higher).

Rules

• Never set prices based on cost-plus alone; cost sets a floor, not a ceiling.
• Always validate pricing with actual customers, not just internal assumptions; stated WTP in surveys is typically 20–30% higher than revealed WTP.
• Anchor with a high-priced option before presenting the target tier; this is non-manipulative framing grounded in cognitive psychology.
• Publish prices for self-serve tiers; hiding prices for all tiers signals low confidence and delays the sales cycle.
• Review pricing annually; failing to raise prices with inflation and value improvement is a silent margin leak.

Examples

B2B SaaS data tool: EVC = saves 10 analyst-hours per week at $75/hour = $750/week = $39,000/year per customer. Competitor charges $8,000/year. Van Westendorp optimal price: $12,000/year. Pricing decision: launch at $10,000/year (74% discount to EVC), position as 20% premium to competition, justify via ROI calculator. Three tiers: Starter $5,000, Growth $10,000 (target), Enterprise custom.

Common Mistakes

• Competing on price with a differentiated product — Dropping price to win deals trains the market to expect discounts and destroys long-run margin.
• One-size-fits-all pricing — Ignoring segment WTP variation means overcharging SMBs and undercharging enterprise; tiered packaging captures both.
• Treating discounts as one-off decisions — Each discount sets a precedent; undisciplined discounting compounds into permanent margin erosion.

Finance disclaimer: This skill encodes professional best practices for educational purposes. It is not financial advice. Consult a licensed financial advisor before making investment decisions.