Product pricing can help your company achieve profitability, support product positioning, and complement your marketing mix.
Once your startup is ready to commercialize its product, you must determine how much to charge customers to purchase the product. In other words, it is time to establish the pricing structure.
Pricing is one of the four main elements of the marketing mix. Pricing is the only revenue-generating element in the marketing mix [the other three elements are cost centres—that is, they add to a company’s cost]. Pricing is strongly linked to the business model.
The business model is a conceptual representation of the company’s revenue streams. Any significant changes in the price will affect the viability of a particular business model.
A well-chosen price should accomplish three goals:
- achieve the company’s financial goals [profitability]
- fit within the realities of the marketplace [customers are willing and able to pay the set price]
- support a product’s positioning and be consistent with the other variables in the marketing mix [product quality, distribution issues, promotion challenges]
Pricing models and positioning for high-tech products
There are different methods of determining the price for high-tech products.
- Cost + profit margin: Add a profit margin percentage to the costs associated with producing and distributing the product.
- Rate of return and break-even point: Calculate the unit price: price = unit cost + [[rate of return× investment]÷ quantity sold]. Then determine the break-even point: the level at which sales figures cover related fixed and variable costs.
- Market price: Set the price according to the main competitor’s price.
- Bidding price: Set the price according to available information about competitor bids and the customers’ opinion of the product’s advantages.
- Comparison with substitute products: Set the price relative to products for which it will substitute.
- Value-based pricing: Set the price based on how the customer values the product. [See below for further details.]
Value-based pricing
Value-based pricing attempts to establish the return generated by the product’s use from the customer’s point of view. How a customer perceives product value, and the actual value the customer receives, can be estimated by identifying:
- the target customer [their budget, ability to purchase]—specifically, the value can be estimated by developing an application scenario
- buyer motivation [willingness to buy, the risk involved]
- the product and its complexity [its ability to meet customer’s objectives]
- distribution [delivery, support]
Value-based pricing and the technology adoption lifecycle [TALC]
Setting a price in the Early Market involves some guesswork as the product’s value is unproven at this stage. To guide your pricing decisions, determine the:
- customer’s expected return on investment from buying the product
- amount your customer may be willing to pay
- referential price for the new product [this is the price compared to the cost of the total project]
Pricing your tech product as your market develops
To cross the Chasm and enter the Bowling Alley, pricing must be based on value. To guide your pricing decisions, determine the:
- amount of money your customer is currently losing [see application scenario]
- expected return on investment with the new product strategy, and when the returns will be realized
- return on investment derived from using the product to solve the problem
Finally, keep your pricing model simple to communicate and ensure it makes sense to the customer. If it does not, your sales staff will struggle in the face of other competition.
In an ideal world, people would flock to your product the moment it’s launched. They would immediately know about it, understand it, and share it with everyone and their mother. Unfortunately, that’s not how it works in the real world. It takes cross-functional hard work and dedication to educate people about your product and convince them to become a user, even if it is the perfect solution to their problem.
What does that cross-functional adoption process actually look like in reality? Look no further! We’re breaking down the five stages of product adoption, the customer engagement funnel, plus some best practices to help your team achieve product success.
What is Product Adoption?
Product adoption is this process of educating people about your product and converting them into users. The initial goal of product adoption is to get more folks to, well, adopt your product, but the process doesn’t stop there. What good is it if you get a bunch of people to start using your product, but then they all log in once and never use it again? You want to make sure your users are successful in your product so that they become long-term users, and hopefully, evangelists. But we’ll get into that later on.
Benefits of Product Adoption
There’s a whole slew of benefits for optimizing and improving your product adoption process. For example, you have a higher chance of reducing customer churn if you can give your users a proper onboarding experience. Increased adoption rates also often lead to higher customer satisfaction, increased customer retention, and a reduced cost- per-acquisition rate. At the very least, increased product adoption means, by definition, that more people using your product, and the more streamlined and optimized your process is, the higher customer success rates you’ll see.
Product Adoption Process
A person doesn’t just become a user in your product overnight. They typically go through five distinct stages: awareness, interest, evaluation, trial, and adoption.
1. Awareness
The first stage of the product adoption process is awareness, which is simply a person’s understanding or knowledge of the product. A prospect may not be aware that your product exists, or may not even realize the problem that your product resolves. Educating the prospect about your product or the problem that your product solves is crucial to spreading the word and making your product more recognizable.
Brand awareness is important at this stage for establishing trust with consumers. It gives your company an outlet to better connect with potential users, receive feedback, and provide a compelling story surrounding your product. To do this effectively, it’s critically important to understand your target personas, their pain points, and how they think and talk about potential solutions. Investing in smart advertising, particularly digital or social media advertising, and putting together a strong marketing team are both keys to raising awareness around your product.
2. Interest
After a potential user is aware that your product exists, you have to get them interested in your product. This step takes them from just general knowledge of your product to seeing value and viewing your product as a potential solution to whatever problem they’re trying to solve. This is the stage where the potential user may do research on your product or a competitor’s product to gather more information.
This is where having a strong online presence can be super helpful. Having in-depth blog posts, informative videos, and an active social media for your product can all help the potential user learn more about your product as they research potential solutions.
3. Evaluation
Once your potential user has gathered enough information, they’re naturally going to start evaluating your product compared to your competitors. This is where they’re going to decide if you are a suitable solution for them and whether or not they’re going to purchase your product.
This is an opportunity to make sure that every interaction a prospect has with your company is a positive one and to position yourself in a way that’s clearly differentiated from your competitors. Having easy-to-access marketing materials can be really useful at this stage. If you can send along a one-pager outlining features in your product vs. your competitor or customer testimonials, you can help the prospect evaluate your product and they will start to see the value that your product provides.
4. Trial
So the potential user has done their research and evaluated all their options. Hopefully, they’ve now decided that your product is the most suitable solution and will purchase it [or at least select a free trial if that’s an option] to test it out.
Allowing users to test out your product before they fully purchase it can be a really great tool to let the potential user see the value of what you offer. A money-back guarantee, temporary reduced cost, or free short-term trial can all help the user get a feel for your product and fully understand how it could help them out in the long run. Strong Customer Success teams that can nail a successful onboarding process, even for trial users, are crucial for this step to lead to adoption.
5. Adoption/purchase
If the trial stage is successful and the user is happy with the results, then they will move into the final stage of the product adoption process and fully adopt, or purchase, your product.
This process is absolutely critical to taking prospects and converting them to paying customers, however it is really only applicable to non-product teams. Think about it; the majority of this process occurs outside of the product itself and before the user has ever even fully seen your product, and so it relies heavily on marketing, sales, and customer success teams to do most of the work. Plus, most SaaS teams won’t even want users going through this process unless they’re confident that they can keep them engaged after adoption, because the threat of churn is too real.
So while non-product teams are responsible for increasing the total number of users at the very top of the funnel and guiding them through the product adoption process, it is the responsibility of the product teams to then keep these users engaged and happy once they’ve actually started using the product.
This second, and arguably more relevant flow for product teams, is the engagement funnel. How do you take a brand new user at the end of the product adoption process and eventually transform them into an evangelist for your product?
Engagement Funnel Stages
So how do you take a brand new user at the end of the product adoption process and eventually transform them into an evangelist for your product? This second, and arguably more relevant flow for product teams, is the engagement funnel.
1. New User
We’ve all downloaded that one app that we ended up using just once as soon as we downloaded and then never opened it again. This is what a new user is; they have access to your product, they’ve checked it out, but they haven’t truly used it yet. Whether they don’t see the full value of your product yet or they don’t know all the features you offer, it is critical at this stage to provide the user with education and support.
2. Active User
If the user takes advantage of these support tools and starts exploring and using your product, they then move from being a new user to an active user. We typically define an “active user” as someone who has some degree of interaction within the product over some specific time window [daily, weekly, monthly, etc.] What that activity is and what the time window is totally depends on your specific product. For example, a product like Instagram may look at daily active users, but a product like TurboTax wouldn’t find that metric helpful since it’s users likely aren’t logging in every single day.
Once you’ve defined your temporal metric, then you can differentiate between an active user, an in-active user and your goal, a champion.
3. In-Active User
An in-active user can essentially be defined as someone who has not hit that threshold of activity. So, if your “active user” definition was logging in one day a week for three weeks, then an “in-active user” could be someone that hasn’t logged once for three weeks. Tracking user activity and risk behavior is essential for your team to be able to proactively reach out to those users with product updates, educational guides, or a call with the assigned CSM to help re-engage those individuals before they churn.
4. Champion
Transforming a user into a champion, or evangelist, is one of the most exciting moments for a product team. A champion is someone who doesn’t just use your product to its full potential on a regular basis, but also actively participates in making your product better and telling others about it. Maybe they’re a part of a customer advisory board that gives your product team actionable feedback, or maybe they inform other people about your product and your features.
A champion is someone who sees the full value of your product, wants to participate in improving it, and share it with other people. The ultimate goal is to become so ingrained in a user’s workflow that they can’t imagine work without your product, so anywhere they go, they’ll bring you with them. It’s central to our idea of User Lifetime Value [uLTV], wherein the lifetime of a user doesn’t rely on the account, but continues for as long as they’re in the workforce.
Important Measurements
There are several important metrics you should be tracking as your user moves through the product adoption and engagement funnels. They can help you measure the success of a new product and identify areas for improvement.
1. Adoption rate
The first metric is a basic adoption rate. This is a simple comparison between your total number of users and your total number of new users, and you will get a percentage of how many of your users are new.
- Formula: Number of New Users / Total Number of Users
- Example:
- New users = 50
- Total users = 300
- Adoption rate = 50/300 = 0.1667, or 16.67%
You can calculate the adoption rate on any temporal window that makes the most sense for your product [daily, weekly, monthly, etc].
2. Time-to-first key action:
This metric shows how long it takes a user to complete an important action within your feature. You can measure the average time of two different scenarios: either how long it takes a new customer to use an existing feature, or how long it takes an existing customer to use a new feature.
- Example:
- The average time it takes a user to first-click a navigation item from the homepage is 5.3 seconds.
- The average time it takes a customer to complete their first transaction on an eCommerce website from when the account is first opened is 12 days.
3. Engagement funnel measurement
Gathering the percentage of your users at each stage of your funnel is crucial for your product team. You can break down the funnel into each section and then find the percentage of each by taking the number in that funnel section divided by your total users.
- Example: Say you have 1,000 total users
- Of these 1,000 users, 900 of them are new users. 900/1,000= 0.9, or 90%
- 90% of your total users are new users
- 750 are active users. 750/1,000= 0.75, or 75%
- 75% of your total users are active users
- 500 of them are engaged users. 500/1,000= 0.5, or 50%
- 50% of your total users are engaged users.
- 100 of them are collaborators. 100/1,000= 0.1, or 10%
- 10% of your total users are collaborators.
- Of these 1,000 users, 900 of them are new users. 900/1,000= 0.9, or 90%
If you want a more in-depth look into how we measure and track user engagement, be sure to check out our blog post on user engagement for more information.
Tips to Improve Product Adoption
Here are a few additional things your team can do to help ensure your customers have a smooth product adoption process.
1. Create a strong first impression
As we all know, a strong first impression is key to creating a smooth onboarding process. If a user is immediately turned off from your product because of design, confusion, or agitation, they are unlikely to come back and try to figure it out on their own. Offering up educational materials, and making sure that users have everything they need to succeed the moment they enter your product for the first time is crucial to improving your product adoption process.
2. Empower users to guide their roadmap
Allowing your users to have a say in the direction of your product will not only help you better understand what they want and what is most important to them, but will make your users feel that you care about them and are listening to their needs. Giving your users the ability to request items, or vote on items you’re already planning on working on, will empower them to increase adoption of your product, and will increase their satisfaction since they feel a close connection to the product. Plus, showing your users that you listen to their requests during the onboarding process can help ease any concerns they may have about your product. It’s a win-win!
3. Announce new product updates
As we mentioned above, product adoption is incredibly important, but it only gets you so far. It’s crucial to keep your existing users engaged once they’re inside your product to help keep your churn rates down. One of the best ways to do this is announcing new product updates, specifically directly inside your product. Not only does it get users excited about new features or updates within your product, but it can be particularly useful for user onboarding so that new users see that you’re constantly updating your product and adding new features. Plus, if you’re launching a feature that a specific user requested, it can be exciting for them to see their request in action.
4. Re-engage users with triggered emails
Event-triggered emails and notifications are a great way to keep existing users and new users engaged in your product and increase your adoption rates. For example, say that a new user clicks on a feature within your product that they haven’t explored yet. If you have an event-based notification go off once they click that feature for the first time, it can help smooth out that onboarding process and ensure that your users don’t feel confused or lost within your product.
5. Validate new feature ideas
One of the best ways to better understand your users’ needs and to better engage your user population is to validate new feature ideas with your users. Whether it’s sending a preview of something you’re planning on working on or using a voting system to have your users rank what’s most important to them, engaging new and existing users in that way can make the users feel more involved in the process and have their opinions be heard. Plus, it helps you decide what to work on next.
6. Use Parlor
Modern SaaS companies need to understand the individual users, champions, and decision makers behind their accounts. Parlor’s URM tracks every individual user’s unique relationship to your product and business to unite your teams around a deep understanding of your most important users.
Create a single system of record for all customer feedback, track how key user segments engage with your product, and report on user insights along the customer journey. As customers dive deeper into your product, use their feedback to personalize their experience and inform product development. By curating a culture of collaboration with your users, you’ll be sure to delight your customers!
Conclusion
At the end of the day, we all just want people successfully using our products and to be satisfied with their experience. But there’s a lot more that goes into that than you may initially believe. You can’t just expect people to magically know about your product and understand fully how it works; it takes a lot of hard work and collaboration between the product and non-product teams to ensure success throughout both the product adoption process and the engagement funnel.