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StrategyP

Pricing Strategy

Definition

Pricing strategy is how a product team decides what to charge, how to structure pricing tiers, and when to adjust prices over time. It sits at the intersection of product, finance, and go-to-market -- and it's one of the highest-leverage decisions a PM can influence. A 1% improvement in pricing yields an average 11% increase in profits, according to McKinsey research, compared to 3.3% for a 1% improvement in volume.

Three foundational approaches exist. Value-based pricing sets prices based on the customer's perceived value (Salesforce charges per seat because each seat represents revenue-generating capacity). Cost-plus pricing adds a margin to the cost of delivery (common in infrastructure products like AWS, where compute costs are the baseline). Competitor-based pricing anchors to what alternatives charge (new entrants often price 20-30% below incumbents to reduce switching friction).

Most successful SaaS companies use value-based pricing as the primary lens, with competitor pricing as a sanity check. Cost-plus rarely works for software because the marginal cost of serving an additional user approaches zero.

Why It Matters for Product Managers

Pricing shapes every other product decision. The choice between freemium and free trial determines your acquisition funnel. Per-seat vs. usage-based pricing changes which features you build (collaboration features drive seat expansion; API-heavy features drive usage pricing). Figma's per-editor pricing model, for example, directly incentivized them to build features that made non-editors want to become editors -- a product strategy baked into the pricing model.

Pricing also determines your customer base. Notion's decision to offer a generous free tier attracted millions of individual users who later brought the product into their companies. Linear's decision to charge from day one ($8/user/month, no free tier) filtered for serious teams and set a quality expectation. Neither approach is wrong -- but they produce fundamentally different products and companies.

Getting pricing wrong is expensive in both directions. Price too low and you leave revenue on the table while attracting price-sensitive customers who churn. Price too high and you slow adoption and give competitors an opening. Evernote's 2023 price increase from $70/year to $130/year reportedly caused a significant user exodus because the perceived value hadn't increased to match.

How It Works in Practice

  • Understand willingness to pay. Run Van Westendorp or Gabor-Granger pricing surveys with 100+ target customers. Ask: "At what price would this be too expensive? A bargain? Too cheap to trust?" The intersection points reveal your optimal price range.
  • Define your pricing metric. The unit you charge for (seats, usage, features, outcomes). The best pricing metric scales with the value customers receive. Twilio charges per API call because each call generates revenue for the customer. Slack charges per active user because each active user represents adoption.
  • Structure tiers that create natural upgrade paths. Most SaaS products use 3-4 tiers. Each tier should have a clear "fence" -- the feature or limit that makes customers self-select into the right tier. Zoom's 40-minute meeting limit on free plans is a perfect fence: casual users stay free, business users upgrade immediately.
  • Test before you commit. A/B test pricing pages with new visitors, run willingness-to-pay surveys with existing customers before changes, and grandfather existing customers at old prices for 6-12 months to reduce churn risk.
  • Review quarterly, adjust annually. Track conversion rates between tiers, expansion revenue, and price-related churn. Plan a formal pricing review once a year, but maintain the data infrastructure to spot problems sooner.

    • Common Pitfalls

  • Anchoring to competitor prices without understanding value differences. If your product saves customers 10 hours/week and the competitor saves 2, pricing 20% below the competitor is irrational. Start with your own value delivery.
  • Making pricing changes without grandfathering. Sudden price increases for existing customers destroy trust. Buffer's transparent pricing approach -- announcing changes months in advance with clear reasoning -- is the gold standard.
  • Too many tiers or add-ons. HubSpot's pricing page became so complex that the company hired a "pricing simplification" team in 2023. If customers can't figure out which plan they need in 30 seconds, you have too many options.
  • Treating pricing as permanent. Early-stage startups often set a price once and never revisit it. Your first price is a hypothesis, not a commitment. Test and iterate like you would any product feature.

    • Related Concepts

    Freemium is a specific pricing strategy where the free tier serves as an acquisition channel. Unit economics provides the financial foundation -- you need to know your costs before you can price sustainably. Product-led growth strategies depend heavily on pricing structure to drive organic expansion.

    Related Terms

    FreemiumProduct-Led Growth (PLG)Unit Economics

    Frequently Asked Questions

    Should PMs own pricing or is that a finance decision?+
    In most SaaS companies, pricing is a shared responsibility, but PMs are increasingly the primary owner. A 2023 OpenView survey found that 62% of PLG companies have product managers leading pricing decisions, with finance providing guardrails and marketing owning packaging. PMs own pricing because they understand value delivery -- which features drive willingness to pay and which don't.
    How do you know when it is time to raise prices?+
    Three reliable signals: your win rate on pricing objections is above 80% (you're leaving money on the table), customers adopt premium features faster than expected (value exceeds price), or your LTV:CAC ratio is well above 3:1. Slack raised prices 10-15% annually in its early years based on usage data showing teams were getting far more value than they paid for.
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