The dark art of product pricing

One key distinction to remember when rethinking the price

Product pricing is a bit of a dark art. New products (or expansions) often struggle to discover the right price. I’ve found one distinction to be especially useful as teams work to discover the right price: separate the pricing model from the selling price.

Let’s begin with a quick refresher on the basics. Money is a medium for exchanging value. So, any pricing discussion is inherently a value discussion. Our products are the mediums through which our businesses deliver value, and we expect to capture some of the value delivered via money.

The trap to avoid is focusing on the selling price before discovering a value-aligned pricing model. Without such a model, we can continually add “value” but remain unable to increase revenue accordingly.

The issue is that value perception is ultimately subjective. It’s difficult to measure the actual value delivered accurately. We usually have to discover proxy indicators for the actual value. In particular, we need to know the top three

How to do this? I like a model I originally learned from my friend Alan Albert, which is to interview customers to find out the top three factors—and their stack rank—in how they perceive value in a product like ours. Do they value reliability, safety, performance, convenience, speed, how it helps them look to their boss? Something else?

I think of this as a sphere with four layers of value, similar to a cross-sectional view of the Earth, with two layers each in the outer and inner core. First are surface-layer value proxies which enhance the value perceived, like how solid the titanium iPhone feels in your hand. Second are other indicators of value, which help the customer confirm that what they value is there, like a solid warranty that helps them feel the product is reliable.

Moving to the inner core, we have the true value itself, the core benefits delivered and how those create progress for the customer. Sometimes, this is measurable, and sometimes not. At the deepest layer is the inner core, which is the customer’s identity and worldview. This core is all about the person, not the product.

The key takeaway? To construct a robust, value-aligned pricing model, it’s crucial to delve into all four layers. You’ll know you’re on the right path when you can anticipate the top three factors a customer values in order of importance, and explain why—before they even share their story.

(This nudge originally appeared on Mind the Product.)