Create a pricing model for a new product

1. Review your business plan to define your business objectives for this product.

Some common objectives for your business includes: Increasing your revenues and profitability. Improving your cash flow. Increasing your market share within your industry. Introducing your product as a first product within the market. Positioning your product as a hero product for your company. Increasing the brand value of your company through this product.

2. Define in your product roadmap how long you want this product to be in the market and when new features or versions will be released.

Pricing models differ depending on the product. For example, computer hardware products are often released every year and the pricing of the product is set according to their lifecycle. In contrast, subscription products typically use monthly pricing and will include any new features in the pricing. You may need to factor these in when you decide on your product’s prices.

3. Review business operations and overheads with your product team and accounting team to confirm your operational costs for the product.

The types of operational costs vary depending on your product, but a typical set of costs include: Raw materials costs. Costs of production including labor, fixed overheads and variable overheads. Fulfillment costs including deliveries, postage amongst others. Operational costs including storage, server costs, cloud infrastructure costs, customer implementation costs, account management and account success costs amongst others.  Once you have obtained all the costs of producing and operating your product, you can look at where you can optimize and find efficiencies and savings. Eliminate costs where possible.

4. Budget your short term and long term business costs.

Add in the costs of the go to market strategy, marketing costs, and any future discounting campaigns to understand the full revenue impact towards this product with these activities outside of producing and operating your product.

5. Research your competition to understand their pricing models and understand how they are pricing their product.

Align with your company’s stakeholders if the business objective of the product is to attempt to be competitive with your product’s pricing, or you are trying to enter the market at a premium level or at a low-cost category to gain market share. Determining your business objectives while understanding your competitors’ pricing will help you find the best price point for your product. Price monitoring tools like price2spy or prisync and many other similar tools provide automated ways of understanding your competition’s pricing without manual research.

6. Send a Likert scale questionnaire to your core customer base to understand their perceived value of your product and their price ceiling.

The Likert scale provides a 5-7 point scale for which your customers can indicate their level of agreement or disagreement with your pricing model. To conduct a Likert scale survey: Specify your goal. In this case, you’re testing the price point for a new product. Create a list of Likert scale indicator statements. For example, The price feels fair or I understand the different price plans. Edit the indicator statements to alternative between positive and negative statements. For example, I feel overwhelmed by the different price plans followed by I understand what features are included with each price plan. Decide on the response scale. The most common options include a range from Agree to Disagree, or Satisfied to Dissatisfied. Build the survey using popular survey platforms like Typeform or SurveyMonkey. Send the survey to your core audience, such as existing customers or those who have joined a mailing list for updates on your new product. Analyze your results. Averages, frequencies, and medians can pinpoint how your audience feels about your proposed pricing.

7. Soft launch your pricing model to a small but engaged customer set to obtain their reactions and feedback to your pricing model.

Monitor this set of your consumers and obtain their feedback to see if they have reacted positively to your pricing and whether there are any other important considerations you may have missed out upon.

8. Launch your pricing model and your product, and try to leave the prices stable for at least half a year.

Any early changes in pricing will reduce the customer’s trust in you and your product. One exception to this would be a failure to sell in accordance with your sales projections and forecasts. You may then need to re-evaluate your pricing model.