TEI 336: Pricing software products right – with Ajit Ghuman

How product managers can solve positioning, packaging, and pricing for their products

Today we are discussing how to price products, helping you avoid common mistakes and sharing steps to make your pricing smarter.

Our guest is Ajit Ghuman. He is the Head of Product Marketing at Narvar, an enterprise-grade customer engagement platform for retailers. Ajit is an expert in software pricing and his book, Price to Scale, covers an end-to-end approach to packaging & pricing for high-growth technology companies. 

Summary of some concepts discussed for product managers

[1:49] What mistakes do companies make when pricing their products?

When a company is having trouble in the market, price point is never really the problem. Upstream issues cause price difficulties. Follow the PPP hierarchy: First solve positioning, then packaging, then pricing. Start with product strategy, determining why the product exists in the market. Then come up with positioning, which is how customers see the product. Next discuss packaging, which is a way to maximize value for different segments. Finally, choose the price point.

[4:52] What’s involved in packaging?

Packaging means including the right set of features the customer values. A large enterprise has different needs from a small business, and they want different features. The point of packaging is to maximize revenue from the market by creating an offer tailored to the customer. Large enterprises want a bundle of features, and higher pricing can increase their perception of value. Small businesses may value a cheaper, lightweight package.

[8:57] Suppose we created a SaaS-based platform for product managers. How do we price this product?

We’ll go through the PPP hierarchy. To determine our positioning, we identify our target segment and how we’re differentiating. Suppose we’re creating product management roadmap software for big enterprise teams. We’re differentiating by allowing a lot of PMs to collaborate.

Next, we move to packaging. A common approach to packaging is “good, better, best,” where a company creates different levels of packages like Pro, Elite, and Platinum. Another option, which works better for enterprise products like our example, is value-based packaging. We make a list of all the features of the product and map them to the use cases the product solves. Then we decide whether our market is homogeneous, needing a single package, or heterogeneous, needing multiple packages. We present our packages to customers and ask them to rate how well the packages perform each capability to meet their needs. Let’s assume we create two packages for our product.

Finally, we think about pricing. Before choosing the price point, we need to make two decisions: our pricing metric and our pricing structure. We have two options for pricing metric: Capability-based pricing sells the product for a flat fee. Consumption-based pricing, which is most common for SaaS products, charges a price per user (most common), API call, SMS sent, etc. For our product, we would choose consumption-based pricing and charge per user per month.

We have two options for pricing structure: A linear scale charges the same amount per user. A three-part tariff provides a volume discount for more users.

Finally, we choose the price point. There are many ways to measure this, including willingness-to-buy surveys, conjoint analysis, or Van Westendorp surveys. Conjoint analysis is best for simpler products. For our software, I would use Van Westendorp. We’ll get a range of options and choose the price point based on competition, positioning, and strategy.

The three important decisions of packaging, pricing metrics, and pricing structure contribute more to revenue than the actual price.

[17:39] What is the role of product managers in the PPP process?