Understanding Product Packaging
The Key Components of Pricing and Packaging
If you’ve ever created or adjusted your product pricing and packaging, you know how complex it can be. Which is why I enjoyed our conversation so much. We covered an array of topics, from segmentation to packaging to the pricing process to why you should avoid freemium in most cases.
You should definitely head over to your favorite podcast app and check out the full episode. I have no doubt you’ll learn a great deal. I certainly did. And understanding the components of pricing and packaging is so important. I’ve been deep in it for the past few month myself, and have been part of pricing and packaging discussions at nearly every company I’ve been at. There are few things that are more important to your business or your team.
I won’t recap the full episode here (check it out below), but wanted to highlight one part of it.
Components of Product Packaging
I asked Dan about packaging, and he nicely articulated the key components of SaaS product packaging. While that phrase may mean different things to different people (and may bring different things to mind in different contexts), it is important to understand that packaging has several components that are critical.
1. Price Metric
The price metric is what the customer is paying for. The unit of value they get. If you are Starbucks, then the price metric (or unit of value) for the customer is a cup of coffee. For Dropbox, and other cloud storage providers, the unit of value is a gigabyte of storage. In my previous company, we charged by space (like a conference room or desk) in an office. Other companies could charge per user. These are all different ways to provide a unit of value to a customer.
What is the thing you’ll be selling to customers?
2. Price Model
The pricing model is how you charge customers for your product. This is fundamental to your business and how you monetize your product.
In the past, software was sold as a onetime transaction. You could buy a disc off the shelf and the software was yours to install and use (I remember buying several versions of Adobe products this way). This is still a viable price model or business model. But we know that many companies (including Adobe) have moved to subscription-based pricing. You pay monthly or annually and can continue to use the software as long as you pay. Other companies also offer pay-as-you-go, like AWS.
Establishing the right pricing model is a critical business decision, and part of the overall packaging and pricing process.
3. Offer Configuration
Next, we have the offer configuration, or bundles. When I think of packaging, this is often where my mind goes, especially recently. But it is only part of the overall pricing and packaging decision.
In software, we are probably all familiar with the “good-better-best” structure for bundles. Pull up just about any site and you’ll likely see three options—some sort of variation of good-better-best. In my last company, we had Basic, Professional, and Enterprise. Each level had increasing features based on the needs of customers.
Looking at streaming services, you’ll often see a similar variation. HBO Max has two options—ads or no ads. Netflix has three tiers, Basic, Standard, Premium, which progressively allow customers to watch on more screens and in higher definition.
Bundles could be endlessly configured, but the point is to simplify the decision process for customers and even point them to what’s “Most Popular” or “Best Value”. Because too many choices can become overwhelming quickly, as we discussed in another podcast: The Paradox of Choice.
4. Price Fences
Finally, we have price fences or pricing differentiation. These can be based on timing, volume, or customer characteristics.
Most of us are familiar with price fences. We have a local restaurant that we enjoy eating at. They have a $20 special before 6pm, so we typically try to get there before 6pm so we can have the option of their early special. This is a price fence based on time.
In the SaaS world, most companies also do volume discounts. Which is often why the “enterprise” level doesn’t show pricing on many sites. Since large organizations can purchase a lot of licenses or usage, they can often get volume discounts that need to be negotiated with sales teams.
It is critical to understand the pricing and packaging has many different components. We can often get hung up on one aspect of pricing and packaging—like what is in the bundle or how many bundles do we offer. But we can’t forget the other aspects of packaging that are critical to success.
Understanding packaging holistically is a key step in the pricing process. And something that should be revisited regularly. Our world isn’t static. Your market isn’t static. And your product (hopefully) isn’t static. So you need to constantly be thinking about the overall product packaging and pricing to ensure you’re correctly “dividing the value you’re delivering” between you and your customer.
Other Good Links
Data Brokers (video) - I think John Oliver is pretty funny, but I’ve liked him since his time on Community (one of the best sitcoms ever created). This video was *chef’s kiss*.
Data collection is way too intrusive, and privacy is always at the forefront of my mind. He highlights the many problems we’re facing with data collection, but also turns the tables at the end. Watch it all the way through.
The Art of Living (article) - I’ve added The Art of Being by Erich Fromm to my reading list after reading this article.
The goal of living [is] to grow optimally according to the conditions of human existence and thus to become fully what one potentially is; to let reason or experience guide us to the understanding of what norms are conducive to well-being, given the nature of man that reason enables us to understand.
Full humanization… requires the breakthrough from the possession-centered to the activity-centered orientation, from selfishness and egotism to solidarity and altruism.
Drought Is Threatening Hydropower in the Southwestern US (article) - This is my neck of the woods, and it has been bad. Hydropower is only one of the problems, but I can’t tell you now frustrating it is that so little seems to be done about better conservation and stewardship in general. It feels like things will only get worse since we can’t seem to get our acts together to fix things.
The Colorado River, an important source for many dams and power plants in the region, has been wracked by drought for the past 22 years—some research suggests that it is subject to the worst drought the area has seen in 1,200 years. Further, according to the US Drought Monitor, as of March 29, 88.75 percent of the Western US has been experiencing a moderate drought or worse. According to staff members at the United States Bureau of Reclamation, other dams in this be-droughted part of the country are seeing similar effects—though the officials also noted that each case is different.