Cheap! Cheap! The Perils of Low Cost Being your ONLY Advantage

How low can you go? Turns out, pretty low! But should you?

Today we’re going talk about pricing, but before we do that, here’s some priceless content to catch up on, including a trilogy of hot takes about AI:

• Firstly, I spoke to Greg Prickril about how AI is going to change everything for product managers, and how we need to be getting stuck into it right now if we don’t want to be left behind. [YouTube] [Podcast]

• I also spoke to Bjarte Rettedal, who believes that these AI models are so potentially dangerous that we need clear regulation around them, and ideally have them under public ownership. [YouTube] [Podcast]

• Last but not least, I spoke to Andy Walters, an AI consultant who believes we’re soon going to be living in an AI-Assistant-First-World, and we talked about what that means for the future of employment. [YouTube] [Podcast]

• We’re starting the next cohort of “Working with Sales - Masterclass for B2B Product Managers” in a couple of weeks. Reviews from the first cohort are stellar! If you’re a B2B product manager looking to reboot your relationship with the Sales team, check it out (and use code NEWSLETTER for a tasty discount).

• If you’re not ready to commit to taking that course, why not check out our FREE lightning lesson “Handling Sales Feature Requests for B2B Product Managers”? Sign up now and attend online or watch the recording later!

Ok, let’s talk about pricing (but remember to subscribe to this newsletter if you haven’t yet!)

The Pros and Cons of Being a Low Budgie-t Solution

Ok, I’ll cut the cheap “cheep cheep” budgie jokes…

I've chatted to a few people recently about product pricing. Some people have been saying they’ve been told that being the cheapest solution is a great strategy and can give you an edge over the competition. Now, these things can be true, but there are some caveats and watch-outs, so let’s get into it.

On the one hand, it makes sense, right? With the cost of everything rising, and budgets more constrained than ever, offering a solution at a lower price point means people will come and buy more of your thing. Yay, revenue!

Some Different Ways to Price a Thing

There are a few common ways to price a thing, whatever that thing is. In this example, let’s assume it’s some kind of SaaS subscription product and you’re going to charge X units of your local currency per month. But, how do we define X?

Cost Plus: We work out how much it costs us to make the thing (which, because it’s software, primarily consists of fixed costs plus stuff like employee salaries and our cloud hosting). This is our floor price, so we add a bit of margin on top and charge that.

Competitor-Based Pricing: We look at how much our competitors charge for a similar offering and charge similar to them, or a bit less to try to attract people to our solution. We could even charge a lot less if our competitors are big, established companies that have been rinsing their customers for years.

Value-Based Pricing: We work out how much value our customers get from your solution. How much is solving the problem we solve worth to them? What would it cost them to solve it if we didn’t exist? How price-sensitive are our customers? Will they pay a premium? Let’s charge that!

The general advice you’ll get from pricing experts is that Value-Based Pricing is the Holy Grail. And why shouldn’t people pay a fair price for the value they’re receiving? You’re leaving money on the table if you charge them a lower price than they’d be prepared to pay.

But, on the other hand, undercutting competitors is a known strategy and it’s fair to say that people like cheaper things and you’ll probably be able to get them to buy them, as long as they solve their problems well enough. They should also have lower expectations (in theory... although some people do seem to expect the world for 9.99 a month).

How Low is Too Low?

I spent a long time in the market research industry and one of the things we did often for clients was some variation of Van Westendorp pricing research. This, broadly speaking, asks questions like:

• At what price does this product start to feel expensive?

• At what price is this product so expensive you wouldn’t buy it?

• At what price does this product start to feel like a bargain?

And, crucially:

• At what price does this product start to feel so cheap that you start to doubt its quality?

Ultimately, if you price your product so low that people think it’s too good to be true, you may end up scaring people away, because they think the solution couldn’t possibly be suitable for their needs.

Defending Against the Competition When Price is Your Only Advantage

When you start out and are basically a small fly on the back of your established competitors, you have the advantage of anonymity and can build a business without too much hassle from them. Eventually, though, you’re going to start to get noticed, especially if you start taking substantial amounts of revenue from those competitors.

The problem with a low price being your only advantage is that you run the risk of being undercut by larger competitors who are prepared to lose money to put you out of business. If you’re starting to look inconvenient, don’t be surprised if they cut their prices for a little bit, especially if they’re making money from other product lines too.

And it’s not just the big players… there are always going to be smaller competitors and new entrants trying to find new, cheaper ways to do things. Maybe you’ve literally gotten the price down to the bare minimum and it’s not possible to do it cheaper. But are you sure about that?

You also run the risk of supermarket-style price wars, where you all end up gravitating to the lowest possible price point and are operating at such a razor-thin margin that it's difficult to invest in the future. We’re not selling cans of beans here.

By all means, be cheap if it helps you in your market, but I'd still recommend building an actual differentiator if you don't want to be disrupted in due course. Ultimately, if you can't answer the question "What would I do if someone charges 5 dollars below me for basically the same service?" then you need to work out the answer to that question!

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