Unlock Higher Profits: Get the Right Pricing Levels

Updating pricing levels is often overlooked, though in a competitive environment it might be the easiest tactic today to increase revenue and profitability.

The process of determining the appropriate pricing levels can be daunting, and getting it wrong can be costly. Here are various methods to help you get started:

1. Economic Value Estimation (EVE)

EVE is a method where the price is determined based on the perceived value to the customer compared to alternatives.?

Steps:

- Calculate Alternative and Differentiation Value Pools: Determine the value your product offers compared to existing alternatives.

- Set Pricing: Price your product at 10% to 40% of the differentiation value.

This method ensures that you are capturing a portion of the value your product delivers over existing solutions.

Illustration:

Imagine an EdTech product that offers significant improvements in student engagement compared to traditional methods. If the added value (in terms of improved outcomes) is estimated at $100 per student, pricing the product between $10 and $40 per student leverages this perceived value.

Try to be as objective as possible in this process. Often the “alternative” can also be the cost of a buyer doing nothing (i.e. not buying a solution).

2. Fair Value Exchange (FVE)

FVE involves plotting your product's price against its value relative to competitors.

Steps:

- Plot Price/Value vs Competitors: Create a chart comparing your product's value and price to those of competitors.

- Set Pricing: Price your product close to the Fair Value Exchange line where your product's value justifies its cost.

This method helps in positioning your product competitively while ensuring customers perceive fair value.

Illustration:

If competitors offer similar features at $50 per user but your product provides additional functionalities valued at $60, you can price your product slightly higher while justifying the added cost.

This method is likely to be adopted by your buyers to make easy comparisons across vendors. However, if your proposition is very different from your competitors (good thing!), this analysis is less useful.

3. Willingness to Pay (WTP) Based Pricing

WTP-based pricing involves surveying customers to determine the maximum amount they are willing to pay.

Steps:

- Survey Customers: Conduct surveys to understand the price points at which customers find value.

- Set Pricing: Price your product between the mid and high points of these thresholds.

This method ensures that the pricing aligns with customer expectations and perceived value. In other words, this will essentially build a price elasticity of demand curve for your offering.

Illustration:

Suppose surveys indicate that customers are willing to pay between $20 and $50 for a subscription. Pricing the product between $35 and $45 can maximize revenue while staying within customer expectations.

This method is highly informative, but you need to ensure your customers truly understand your value proposition to work.

4. 10 / 20 Rule

This rule calculates pricing based on the expected return on investment (ROI) over a three-year period.

Steps:

- Calculate ROI: Determine the return customers can expect over three years.

- Set Pricing: Price the product to achieve a 10X to 20X return on investment, adjusted for different customer segments.

Illustration:

?If your EdTech ERP solution can help a school save $200,000 in operating costs over three years, pricing the product at $10,000 to $20,000 ensures a significant ROI, enticing adoption without being cost-prohibitive.

This approach is particularly useful for fairly complex solutions which can have a sizable economic impact for the buyer. It is also ideal for blue ocean solutions which have very unique value propositions.

5. Lifetime Value (LTV) Based Pricing

LTV-based pricing considers the predicted customer lifetime value in relation to customer acquisition costs (CAC).

Steps:

- Calculate LTV to CAC Ratio: Predict the total revenue from a customer over their lifetime.

- Set Pricing: Price the product to achieve an LTV to CAC ratio between 5:1 and 10:1.

This method ensures profitability by balancing acquisition costs with long-term value.

Illustration:

If the LTV of a customer (e.g. for a tutoring service) is $500 and the CAC is $50, ensuring the pricing supports an LTV to CAC ratio of at least 5:1 means the product price should allow for at least $250 revenue per customer.

We highly recommend adopting this approach only after determining pricing using the other more customer-centric techniques above as a financial viability check. This is the best strategy to stay competitive and be value aligned.

6. Industry Margin

This approach aligns your pricing strategy with the contribution margins typical in the industry.

Steps:

- Calculate Contribution Margin Delta: Compare your margins with the industry standard.

- Set Pricing: Adjust your pricing to align with or exceed industry margins.

Illustration:

If the average contribution margin for online courseware is 60%, pricing your product to ensure a similar or higher margin might be a good idea.

This method is a good financial check, but it assumes you know the operating cost of your competitors. Prioritise first other pricing methodologies.

Conclusion

Selecting the right pricing strategy involves understanding the value your EdTech product offers, customer willingness to pay, industry standards, and ROI expectations.?

By leveraging these methods—Economic Value Estimation, Fair Value Exchange, WTP-based Pricing, the 10/20 Rule, LTV-based Pricing, and Industry Margin—you can determine a pricing strategy that aligns with your business goals and market conditions.

It is highly recommended that you adopt several of these methods rather than only one. Following this approach will ensure you are in tune with current market conditions and may help increase your revenues today.

That's all for now folks!

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