How do you decide how much to charge for your product?

Rami is the Chief Product Officer at Abnormal Security, where he leads the company’s product vision, strategy, and execution. In his masterclass, Rami walks through the steps necessary to build a world-class product from scratch, providing time-tested principles that enable product teams to come to life. Previously, Rami held various product leadership roles at Amazon Alexa, led product marketing and sales at Swagger (acquired) and led product management at Reverb (acquired) as VP of Product. Rami also led product management and marketing at Proofpoint, from company inception to IPO, for its inbound and outbound cybersecurity products.

You can't talk about pricing without talking about some of the things that are adjacent to pricing. One of the most fundamental things is what the business model is of the business. as an enabler, to support a pricing model and there are two different things. So if you think about business model. It’s just, there's some future where you're operating at scale where the business model has to make sense.

It has to yield a positive contribution margin to the business. If there's no line of sight to that, then it's probably a bad business. and a very concrete example of that is let's say,you're a photo sharing app and you know that with each marginal customer. That you bring on.

It's not profitable. Like the costs associated with supporting a marginal customer. There is no path to profitability ever, then it doesn't make sense to pursue that [00:01:00] and no amount of pricing within a certain, obviously within a certain band,can influence that. So to me, it's always around, looking really deeply at the business model, especially.

When you're searching for a business model and searching for pricing for something that's not yet priced, you just want to make that point. That is really important and there might be even opportunities to innovate, even in an existing company on a new type of business model that convinced support is series of products and a series of pricing.

Now let's talk about pricing, value based pricing. Is really the name of the game here. You don't want to price based on cost or your own view of the world. You want to price based on your customer's view of the world, which is really what is the perceived value that they have of your product or service or stated another way?

What is the perceived value? But they have of the problem that you're solving for them. And there's [00:02:00] different ways you can backtrack into that. it's more art than science and, it requires experimentation and discussion. One of the things which I can also talk about later is decided you have one way versus two way pricing decisions.

But, if you're ultimately, if your product creates value for customers and we talked about product market fit and, it's that sort of resonance with the market. You're clearly creating value. So then the next question is, how do you capture that value? In the enterprise space, it's actually relatively straightforward.

There's different, techniques, you can. use, so for example, let's say you have a product that optimizes some workflow. You just make it more efficient, right? It's a very simple exercise to say, if today, four people are required for that workflow and you're coming in.

With your software and the problem you're solving for them. And you can reduce the four people to two people. you [00:03:00] can backtrack into some quantifiable value proposition around that 50% savings. Multiplied by the fully loaded costs of the salaries. And now that just gives you a starting point to think Hey, if I'm saving the customer $300,000 a year from a 600,000 spend, then you know, maybe I can charge $150,000 for my service and there's instant value.

So there was a lot of these types of techniques you can use, but I would really encourage everyone to think of it from a value based pricing and to have that upfront discussion very quickly and soon with customers to, ensure that, as you go on the path to deliver and your product or service or a new company that you're keeping the end goal in mind, that this is a business, right?

Vetting this, there is, Steve Blank, I believe, from Berkeley, he has, this view is, start [00:04:00] out asking them, Hey, would you pay a million dollars for it? And if they have sticker shock, say, oh, would you pay 900,000 and 800,000? you're not starting at a hundred K and working up, it's working down and that's a little bit of a simplified example, but I would be, really, I would try to.

Be aware of, what, the extent of the problem, your rights, but solving for them. The last point I'll make is. It's also important to think around segmentation of your customer base. Not all your customers are created equal. think about the ideal customer profile, understand what segment, those guys are in and come out with your offering, but you might have additional segments and there you want to start price discriminating.

And you see this all the time. We see different bundles high, medium, low. that way, if you're a customer and you're getting value on. if you're getting a lot of value out of the product, maybe you charge [00:05:00] more, if perhaps you're a little bit more price conscious and you're not, in a situation where you have a big budget, there's an offering for kind of a lower price.

But it's what we call price discrimination and the net advantage to you,as a, as a, product for a Samuel or as a startup is rather than having a customer walk away because it's too expensive. Now you're catering to their second. You see this often mid-market versus enterprise and there's other, situations where there's a few really clear segments.

To me, this is more of an optimization, but it's important to keep in mind, what your kind of ideal customer and what the neighboring segments are. You can have all the spreadsheets in the world and at the end of the day, It's around price discovery. You just don't know. And there's always nuances and unique aspects of every market and expectations, [00:06:00] especially if you're going into an existing market.

So it just, to be a very deliberate, will serve you. as in the Steve black example, I mentioned earlier this idea of one way versus two-way door decisions. There are certain actions you can take. That once your go down that path, it's very hard to reverse course.

and so an example might be, if you start on the lower end, it's probably really difficult to go back to that same customer with the same product offering and be like, Hey, you know how I charge you? a hundred K six months ago, it's actually not 200 K. And, and that, so thinking about your entry point.

and making sure you still have the two way door where you can back out of a decision that is really important, which means perhaps start higher. Even if you're a little bit overinflated. You don't yet know what the district. Structures are like, or what the industry will bear. They can always go lower.

So that'd be an example, something to keep in mind when there's probably other [00:07:00] similar items to pricing, that makes sense, where you can change course without changing customer perception, but other things where if you change course, the customer might just, it just won't be met in a positive manner.

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