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ArticlePricing and packaging for a new product
Price signals value and shapes who buys. For a new product it deserves the same care as the product itself, including testing before you scale.
New products are often priced in the final weeks before launch, with a quick look at costs and competitors and a figure that feels about right. That is a missed opportunity. Price signals value and shapes who buys. It affects which customers you attract, how they perceive the product, how your sales team sells and how much margin you have to invest in growth.
Pricing deserves testing, just as the product does. This article sets out three principles for pricing and packaging a new product, and a practical way to test them before the price list is fixed.
Why cost-plus pricing falls short
The most common approach is to calculate the cost of delivering the product and add a margin. It is simple and feels safe, but it ignores the customer. A product that saves a customer a great deal of money may be underpriced at cost plus 30%, while a product with little differentiation may not sell at that price at all.
Competitor-matching has a similar weakness. Copying a competitor’s price assumes your product delivers the same value to the same customers, which is rarely true for something genuinely new. It can also start a price war that neither side benefits from.
Cost still matters: it sets the floor below which you lose money. But the price itself should be set by what the product is worth to the customer and what their alternatives cost.
Anchor on value
Understand what customers gain and what alternatives cost. Start by asking what changes for a customer who buys your product. Do they save time, reduce errors, increase sales, avoid a risk or replace something more expensive? Try to put rough figures on it, using conversations with prospective customers rather than assumptions.
- What does the customer do today to solve the problem, and what does it cost them?
- What would they gain in time, money or risk reduction by using your product?
- What would a competitor or substitute product cost them?
- Who in the customer’s organisation feels the benefit, and who controls the budget?
Value is not always financial. A product may reduce stress for a small team, help a manager look good to their board or remove the risk of a compliance failure. These benefits are harder to quantify but often drive the buying decision, so capture them in the customer’s own words.
The answers give a range. At the top is the value the customer gains; at the bottom is your cost. The right price usually sits well below the value, so the customer has a clear reason to buy, and well above cost, so you can sustain and improve the product.
Offer clear options
A few well-defined packages help choice. Customers differ in size, needs and willingness to pay. Packaging lets you serve them at different price points without negotiating every deal from scratch.
Three packages is a common and effective structure: an entry option for smaller or cautious buyers, a core option designed for most customers, and a premium option with additional features, capacity or service. The middle package should be the obvious choice for your target segment.
Packaging principles
- Make the differences between packages easy to understand at a glance.
- Base the differences on what customers value, such as capacity, features or service level, not on arbitrary limits.
- Avoid too many options; more than four packages tends to slow decisions.
- Name packages for who they are for, not with abstract labels.
- Keep add-ons few and clearly priced, so the total cost is predictable.
Test and adjust
Pilot prices with a few customers before scaling. A new product’s price is a hypothesis. Testing it with real customers, in real buying decisions, shows whether the hypothesis holds before it is printed on a website or built into a partner agreement.
- Offer the product to a small group of early customers at the proposed price and packages.
- Track how many accept, which package they choose and what objections they raise.
- Ask those who decline whether price was the reason, and what they compared it with.
- Watch for signs of underpricing too: if everyone accepts instantly without question, the price may be too low.
Consider a typical software company launching a reporting tool for finance teams. It offered three packages to its first 20 prospects. Almost all chose the middle option, and several asked whether a premium package with dedicated support was available. The company raised the premium price, added the support service and simplified the entry package, all before the public launch.
Raising prices later is harder
Early customers anchor on the first price they see. It is far easier to start a little higher and offer launch discounts than to start low and try to raise prices once customers are established.
Pricing and the sales team
A price list is only as good as the way it is sold. Give the sales team a clear explanation of the value behind each package, examples of the customers each is designed for and rules for discounting. Unlimited discretion on discounts quickly erodes the value of careful pricing, while some flexibility within agreed limits helps close deals.
Review discounting regularly. If most deals require a discount to close, the list price may be wrong, the packaging may not fit customers’ needs or the sales team may need better support in explaining value.
Where to start
Revisit pricing at least once a year after launch. Costs change, competitors respond and the product itself improves. A regular review, using real data on wins, losses, package choices and discounts, keeps pricing aligned with the value you deliver.
Hold five or six conversations with prospective customers about the problem your product solves and what it costs them today. Use what you learn to set a value-based range, draft three packages and agree how you will test them with your first customers. Review the results after the first few months and adjust before you scale.
Source: Intelliversal analysis.
