I recently came across a really good article by Ronen Nir, Why Startups Shouldn’t confuse “Price” with “Pricing” (and how to tell them apart), in it, Ronen does a great job of laying out the difference between Price versus Pricing.
Price represents the value that the product or service brings to the customer while pricing is the method by which the company determines the price.
While I dislike Ronen referring to this as Price instead of just sticking with product value, the definition is spot on and a good launch point for understanding how you set product pricing.
I mentor a lot of very early stage startups, usually those that are a single found with an idea, or a pre-alpha product. Pricing (or product value) v Price can be a confusing concept to impart on someone who doesn’t have a Product Management or Sales background and more importantly, has not actually gone through the process of price discovery.
I have found that the best way to determine price/product value is to spend a lot of time with customers or prospects and document their current environment as much as you can, and then attribute cost structures to it.
As an example, when determining the price for my current product line at LeadingReach, I literally sat at doctors offices for hours at a time with a stop watch and documented every single system they interacted with and how much time (to the second) they spent interacting with it. Included in this “Time and Motion” study was the time they moved between systems (walking to the printer for a demographic sheet, walking to the fax machine, etc).
After I had collected all of this data, I built a flow chart of what the typical process looked like and color coded each system. Additional research gave me a good indication of price per minute for various systems. Adding all of that up, I could very confidently address how much money was spent on this process today.
If my product was 40% more efficient at this process, I now know the price (product value), or “the value that the product or service brings to the customer”. From here I worked with our sales team to determine our pricing strategy based on a multitude of factors (Saas v On-Premise, Size of Clinic).
Price (product value) is not a difficult metric to establish, the bigger problem is that most people don’t have experience in determining it. Time and Motion studies are a great way to determine not only process but other features that your product should include.