Pain-based pricing: focus on the pain, not the product

"What is a cynic? A man who knows the price of everything and the value of nothing."—Oscar Wilde, Irish writer and poet.

Golly, people always seem interested in talking about pricing. The excellent book The Strategy and Tactics of Pricing by Thomas Nagel serves as a good example. It's $60 on Kindle. (YIKES!)

But it actually makes sense.

After all, what is the value of setting your product price correctly? (or better yet, what is the pain if you price the product wrong?)

To the photographer who just lost all his photos stored on a failed drive, a backup service has huge value. To the company who spent a bundle on a launch that failed, ensuring the next launch succeeds has huge value. To the product manager who stored files on SharePoint and now cannot find them, a product playbook repository has value.

The key to value-based pricing is to align the price to the pain. The key to value-based pricing is to align the price to the pain. [Tweet this] (Call it pain-based pricing if you prefer.) What is the value of removing the pain? 

It's often easier to skip the principles of pricing and just look instead for good examples. After all, you don't really care about pricing theory as much as you want to correctly price your product, right?

Apple tries to force the lowest possible price from content creators of books and video; remember, Apple is selling devices, not content. Apple premium prices their products (iPad) and sell commodities (content) as cheaply as possible. Operating system upgrades are free, their productivity software is cheap—that’s so you'll continue to buy new hardware (at a premium.) By contrast, Amazon is the opposite; they pretty much give away the Kindle so you'll buy more content.

Consider these pricing approaches from products you might use.

• Transaction (eg., devices or one-time legal work)
• Subscription (eg., Dropbox, internet access)
• Usage (eg., minutes or data used)
• Users (eg., Jira, Google apps)
• Revenue sharing (Shopify and Paypal)

As you reflect on which of these seem “fair” to you and which make you feel ripped off, you realize the connection between price and frequency of the pain. That is, how often the pain occurs tell us whether to use a one-time fee or recurring fees.

On one of my shows, one of the characters keeps making really dumb public mistakes. It’s not a one-time problem. Since the public relations nightmare is ongoing, his PR firm needs to set up a retainer relationship. Same with lawyers. If you need to incorporate a business, you do a one-time transaction; if you’re continually writing contracts (or getting thrown in jail), you’ll want a continuous (ie, retainer) relationship.

Atlassian makes an excellent bug tracking product in Jira. Use it for free and get to love it. But the real pain of managing bugs occurs when you have a bunch of developers working together and that’s when Atlassian asks you to start paying for Jira.

Got a product to sell? You can set up a Shopify store fairly quickly. They charge a monthly fee for hosting (starting at $30/mo) but their big money comes from handling your financial transactions (for 2% of the transaction). Revenue sharing only seems to work when the partner brokers the money.

I find most products employ some variant of these basic approaches but you’re not done yet. You also need to take into playbook your business focus and competitive marketplace. What business are you in? And what business are your competitors in? Consider the Apple and Amazon examples.

So the first step in defining your price is understanding the buyer’s pain. And then create a price by leveraging your business capabilities in the competitive marketplace. Which products are truly unique and which are commodities? Which leverage your unique capabilities?

Play with different pricing strategies. Evaluate models for other companies in other industries, and then develop a similar pricing model for your products. (Be sure to test it in the market before taking it live.)

If your playbook contains a business model, you should revisit your pricing model periodically. Make sure your pricing aligns with your market’s pain.