Pricing a breakthrough product
If you’re a horse rider then coming off your horse is something that’s going to happen to you occasionally:
This rider survived – walked away, in fact – because he was wearing a special protective jacket. As the rider fell, a ripcord attaching his jacket to the saddle was pulled. By the time he hit the ground, a CO2 canister had inflated an airbag inside his jacket and cushioned his fall.
How do you price something like this? If you’re selling a product people are familiar with – a fizzy drink, a car, a house –then it’s straightforward. You look at the price everybody else is charging and charge a little bit more or a little bit less depending on whether your product is better or worse than the competition. You know that your customers will look around at similar products in the same category to decide if they’re being charged a fair amount or not.
But if you’re creating an entire new category then you’ve got the chance to set the fair price for all products in that category. Customers try to find reference point so they can judge value. If there aren’t any obvious reference points within their immediate grasp then you can create them. In this case, you’d get customers to think about the price of their life (or that of their child). Or you’d encourage comparisons with similar categories, and then emphasize the differences (it’s like a normal jacket, but ten times safer; it’s more likely to save your life than a $500 hat).
There’s something else even cooler about this jacket though: its versioning. Versioning lets you sell different editions of the same product at different prices. A premium version of a product should target a distinct group of customers who get additional perceived value from the extra features, and who are able and willing to pay for it.
In software, this is often done with ‘standard’ and ‘pro’ versions (if you work in a corporation you’ll want to use Outlook and your company will pay for a premium edition of Office. If you’re using it at home, you’ll get the entry level edition and get fewer features). Fast food outlets do it with portion size (hungry customers will pay more money for more food). Airlines do it with travel classes. Normally, the extra money a consumer pays has little to do with the extra cost to the provider (some more bits and bytes, a handful of fries, some more legroom) – it’s simply about finding multiple price points to fit different customers’ preferences.
The riding jacket gives a vivid example of how versioning can be done on anything customers perceive as valuable. You can buy the standard edition of this jacket for about $580. But you can get it in pink for $725. It’s not a meaningful, practical distinction. A pink jacket is no more likely to save your life than a black one. It costs the manufacturer no more to manufacture it in pink than in black. It delivers no more value. But it’s a difference that some people are willing to pay for.
It’s clever in another way too. Since the jacket is innovative, and people lack reference points, it creates its own reference point. Suddenly, the $580 seems like good value.
For product versioning to succeed you need to make sure that:
- The features you’re adding provide extra value to a subset of your customers
- Those customers can, and will, pay extra for it
- There is a coherent story that identifies those customers, and why they need the extra features (‘hungry people want and will pay for more fries’)
- This coherence is important. If all you’re doing is adding a bunch of features to your product or if the people who value those features aren’t the people who can pay for them, then you’ll struggle.
Pricing’s a fascinating topic. It’s often far more about psychology ($580? Is that expensive? Is it cheap? Am I being ripped off? I want it in pink!) than economics (would I rather spend $580 on a jacket or on a holiday? How much utility would I derive from those two options?). If you want to learn more about product pricing then check out my free eBook (‘Don’t just roll the dice – usefully short guide to software pricing’).
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