Pricing mistakes in either direction can sink an otherwise promising product along with its parent company. Pittsburgh-based software product manager Mike Capsambelis, a veteran of MSA and Confluence, describes how B2B technology producers can tie the price of their products to the value customers gain from their use.

Imagine this: after several years of unrelenting laboratory and field development work, your company is about to launch a brand new B2B high technology product – a first of its kind. There’s no competition. In fact, there aren’t even similar products or adjacent projects to compare it against. It’s in a category by itself. And it can do wonderful things that most people in your client industry didn’t even realize were missing. Now what?

As hard as it may have been to create your technology breakthough, the most difficult part is yet to come, according to new Maya Viz software product manager Mike Capsambelis. “Pricing is the hardest thing about product strategy,” he pointed out, “because it involves your entire marketing plan, your financial model. You have to make sure you can position your product based on the value it provides. A pricing mistake could cost you thousands of dollars in profits or hundreds of customers. And there isn’t an easy answer.”

Of course, there are some reality checks. For instance, it helps to know your cost of development, your cost of production, and your cost of sales. Otherwise, you can end up losing money with every sale. But pricing to recover costs is easier to do with commodity goods than it is with knowledge products. 

Real value

What is more important in setting the price for technology products is to figure out, from the customer’s point of view, the real value of solving the problems your product was created to do. 

“The mechanics involve figuring out how much time they’re spending on a problem, or how much re-work they have to do because of a manual process, or because of older technology they have in place,” Capsambelis said. “You can also look at things like how many errors they have that cost them time or money to correct. Where are the inefficiencies that cause them to hire more people, such as people doing quality checks on data, when they could have a computer doing it for them? It’s really figuring out all those costs from the customer’s point of view and what they’re spending to solve this problem today. That’s your starting point.” 

Developing that sort of information involves cultivating intimate access to the people you hope to see become your customers. However some skip that step, build a solution, and then take it to the market to figure out how clients would use it. But the risk of failure in that approach is high. A better approach to B2B product development is when someone from the target industry sees a problem and decides to solve it. That gives you domain expertise right from the get-go. And that can be a real advantage, Capsambelis pointed out. 

Even so, an individual’s industry-specific knowledge eventually becomes outdated. New problems emerge. New market conditions take effect. As a result, refreshing your stream of industry knowledge is an ongoing challenge, according to Capsambelis. One way to do that is through syndicated research services. “There is a lot of research already gathered,” he acknowledged. “And for a certain sum of money, a lot of companies will go and research information on your behalf. That can be a big head start. But it’s not necessarily a good substitute. At some point you need to sit down with the customer and test your vision on them and see what their response is. And a lot of time that’s difficult because it’s potentially an altogether new product category. It may not be obvious to people. You really have to verify that what you’re proposing to sell them is going to solve a problem that’s meaningful to them.”

The opening act

But now it’s showtime. Your product is ready to ship. Your marketing communications have been revved up. You’ve done your best to figure out a pricing model. Now it’s the market’s turn to speak. Already, several visionary customers have shown themselves eager to put your product through its paces. And they’re willing to pay what you’re asking. So does that mean your pricing model is right on the money? 

“That’s a big trap,” Capambelis answers. “Even with all the literature about Crossing the Chasm, it’s still amazing how many companies fall victim to getting stuck on one side of the chasm. It’s really misinterpreting the response from the innovative companies as being typical for the market, because it never is.” Early Internet commerce enthusiasts, whose excitement inflated the dot.com bubble for a few brief shining moments between 1999 and 2001, provide a classic case of early adopter zeal and its resulting economic distortion. 

“Early adopters actually play a much larger role in fleshing out the product, working out bugs, and helping to fund your enterprise so you can go after the larger market,” he said. “When you do go after that larger market, it’s like selling to a whole different segment of buyers. You have to take that money, and what you’ve learned from the early adopters, and look at ways to come up with a standard pricing model, a standard product, a standard support model, and all the other things most mainstream companies require you to have before they’re willing to do business.

“Pricing for that market should be in your head from the beginning. And the visionary companies and early adopters help you get there. But you definitely shouldn’t mistake them for what’s typical,” he said. 

Differential pricing

It’s also a good idea to consider a pricing model that sells the same product at different price points to different customers. And it can be justified because different customers derive different benefits from it. “You can probably sell a software package to a financial services company for ten times what you could sell it to a nonprofit agency,” Capsambelis said. “Customer reaction depends on how you model it and how you position it. 

“One of the things you can do with software products is to build a model that reflects the value you can get from the system. And that can be based on a number of factors. For instance, the revenue of the company, or how many company jobs your software automated. The big gorillas of the market understand that smaller companies can pay less because they’re getting less for their money,” he said.

However, even after a market matures and competition enters the space formerly occupied by a unique technology product, pricing decisions can still be a judgment call. “If your product is still the best on the market, you can choose to not be swayed downward by your competitors,” Capsambelis said, noting that some companies can retain their positioning as providers of superior, premium products. But there are risks in pursuing that strategy. “Sometimes late adopters will say ‘we don’t need the best system, we just need a system.’ The competitors are looking at your pricing as well, and if they take a different pricing strategy, like positioning themselves as the budget version of your software, you just might want to let them have that space. You really have to take into account what the competitors do to change the market.” 

The art and the science

Because of the complexity and range of variables that affect pricing decisions, product managers – along with their sales staff and other key colleagues – often become overwhelmed in trying to peg initial product prices. “People make one of two mistakes,” Capsambelis observed. “They either don’t put enough thought and research into their pricing decisions and arbitrarily pick a pricing point, or they spend too much time agonizing over it. Pricing is kind of a science, but there’s a bit of an art to it and there’s a bit of intuition involved. And sooner or later, you have to make that decision and take it to market and see how it goes. 

“But the Number One way to figure out how to price your software is to look at how customers evaluate their purchases and how they spend their money. That’s how you can figure out if your product is going to provide enough value to get them to spend their money.”

ABOUT THE AUTHOR:
Peter Longini is a Managing Editor for the Pittsburgh Product Strategy Network. Peter is a former professor of communication research at the University of Pittsburgh and professor of TV-Radio at Brooklyn College, CUNY. During the 1980s, he was an executive speechwriter at PPG Industries in Pittsburgh. Since 1992, he has been the principal of Peter Longini Communications, an editorial services company in Wexford, PA whose clients include various publications, public sector agencies, nonprofit organizations and corporations. In January 2003, Dr. Longini became an adjunct faculty member of New York University and Director of Communications for Cranberry Township, Pennsylvania. He can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it