Wednesday, May 10, 2006

Pricing in a Nutshell

Joel Spolsky wrote one of the best articles on pricing I have seen. It is a rather long article (yet well worth the read), but here is a "Cliff's Notes" version for you:
  1. The simplest theory of pricing is that you plot a demand curve (units sold versus price) and choose the single price for your product that maximizes profit.
  2. More complex pricing involves segmenting your market based on what they are willing to pay and pricing your product differently for each segment (e.g. via "Professional" and "Home" versions of the product).
  3. Segment-based pricing tends to turn people off, eroding customers' attitudes about your brand.
  4. In some markets, there are certain "magic" pricing thresholds. For example, software that costs over $1000 typically requires "serious corporate signoffs".
  5. Focus groups are a poor way of assessing the best price for a product.
  6. A high price often will positively impact the perceived value of your product, so the demand curve sometimes is upward sloping (more units sold at a higher price).
The one thing Joel leaves out is using negative pricing to determine the price of your product.

No comments :