Pricing analysis: how to maximize profit and deliver value

The biggest streaming companies offer similar services at different price points.

Why?

What differentiates Netflix, Hulu, Disney+, Max, Paramount+, Amazon Prime, Apple TV+, and all the other streamers out there from each other?

(Wow. That’s a crowded market.)

Coming up in this post, you’ll learn:

• The importance of pricing
• How to conduct a six-step pricing analysis

What is a pricing analysis?

A pricing analysis is a strategy that involves researching your audience, market, and competitors to find an optimal, data-driven price for your product or service.

Successful product-led companies know their customers and what features they find valuable. They also know what their competitors charge and where they sit in the market.

The process of finding out this information is a pricing analysis.

Want an example? Spotify recently announced an increase in its subscription charge. We worked out the optimal price it should charge for a subscription using Decipad: Spotify subscription pricing analysis.

Whether your an e-commerce company, freelancer charging an hourly rate or responsible for pricing at Spotify, the reasoning is the same: you need to know how much people are willing to pay for your product or service right now. 

And, you need to account for future fluctuations in things like:

1. The market
2. Your customers
3. Your competition
4. Your costs

A successful pricing analysis fits your audience today and scales into the future. Because no customer wants to deal with an inconsistent, ever-changing price. It’s not a good look.

Make pricing an ongoing process that regularly confirms you’re charging the right amount for the value your product delivers and adapt to change when necessary.

What are the benefits of a pricing analysis?

The right price can boost sales volume, increase your market share, and steal potential customers from your competitors. (All things that go down very well in the boardroom.)

Most businesses conduct a pricing analysis to improve profitability. But, the benefits go beyond that. A strong pricing analysis helps you:‍

1. Nail down your value proposition (e.g. determining your unique selling point that makes your higher cost worth it)
2. ‍Effectively plan promotions and discounts (e.g. get markdowns right in a recession)
3. Get more insights into your customers and competition (e.g. understanding your customer profile and the price they can pay)‍
4. Keep on top of market trends and fluctuations (e.g. adapt pricing when new technology impacts your service)‍
5. Sharpen your go-to-market strategies (e.g. use insights gained to better communicate your ROI in market)

Think of a pricing analysis as a way to hone and amplify the value you deliver to the people your selling to. And this knowledge dictates your optimal price.

The crucial elements of a comprehensive pricing analysis strategy

Some people use the phrase “competitive pricing analysis” to refer to the entire model. They might even base their pricing exclusively on what their competitors charge. 

Let’s clear that up first. Comparing your competitors’ prices is only one part of a cohesive strategy.

Here are four other essential parts to conducting a thorough pricing analysis model:

1. Product costing: Take into account costs to operate your product or service and the margin you want to make
2. Market Research: Consider policies and fluctuating market conditions (e.g. regulations, inflation, interest rates)
3. Speaking to customers/target consumers: Understanding what people in your target audience are willing to pay
4. Adapting to change: Build your analysis in a way that lets you interactively explore different scenarios

Each of these strategies should look at current findings, future predictions, and historical data.

Let’s dive deeper into each of these areas, so you can know if it’s time to shake things up and optimize your pricing.

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How to conduct an in-depth pricing analysis

Any price change should be a result of evaluating multiple aspect of your business.  

Here’s the playbook:

• Determine how much your product costs
• Assess your market and economic climate
• Conduct a competitive pricing analysis
• Understand your customers and target audience
• Align your value proposition to your pricing strategy
• Use technology to adapt to consistent change

1. Determine how much your product costs

The simplest form of pricing is this: total all your costs and add the margin you want. Task complete ✅.

Not so fast. This method presumes that all your expenses and suppliers adhere to set prices. That's not realistic.

To start, gather all your costs to build, create, and maintain your product or service, such as:

1. Employees and labor
2. Materials and technology
3. Shipping and postage
4. Marketing fees
5. Hosting and servers

Segment your costs into types: fixed, variable, and semi-variable. This allows you to calculate a more adaptive and precise model.

1. ‍Fixed costs remain constant regardless of production or activity levels. Examples include rent, executive salaries or a long-term contract.‍
2. Variable costs change in proportion to production or activity levels. Common examples are raw materials, direct labor, and variable sales commissions.‍
3. Semi-variable costs have characteristics of both. They consist of a fixed component that remains constant and a variable component that changes with activity. An example is a utility bill for a production facility.

Aggregate all your costs into your baseline. Now, you can add additional variables, like a buffer for inflation and target profit margin to play with different scenarios.

Here are two templates to help you in this step.

1. Cost Template: Easily calculate fixed, variable and semi-variable costs
2. Pricing Calculator: Configure your price based on production costs and target margin.

2. Assess your economic climate

The art of pricing means extracting the maximum value from your buyers. After all, you're offering a solution and aiming to make it genuinely worth their investment.

After calculating your costs, evaluate your price and target profit margin against the economic climate in your target markets. Consider ethical, legal, and market factors.

For example, in an environment of soaring inflation, customers tend to tighten spending on "luxury" items. Let's take the US. While spending has risen since early 2020, spending growth lags pre-pandemic levels due to inflated prices.

In response, 85% of software companies in a recent survey said they plan to adjust prices and drive value over the next couple of years. But what does that look like?

Roughly 50% say they’ll likely need to reduce discounts and increase renewal prices.

How do you take necessary measures and avoid mass churn in the short-term? In times of inflation, McKinsey suggests these pricing tactics to preserve customer loyalty and maintain long-term value:

• Reset discounts and promotions, then maximize non-price levers like communication and differentiation to shift where your “worth” comes from
• Instead of broad increases that break down trust, tailor changes to elements that are less price-sensitive (such as add-ons)
• Act quickly in response to customer feedback with a cross-functional, decision-making team to reduce friction
• Provide cost-reducing alternatives (such as a cheaper design or packaging) that don’t negatively impact functionality

3. Conduct a competitive pricing analysis

A competitive pricing strategy is not just about comparing price. It involves three tasks:

1. Identify a cohort of competitors
2. Work out their value proposition
3. Compare pricing strategies

Once you've gathered your competitive list and relevant data, look for patterns and trends to determine where you fit in terms of price and value.

1. Where are your competitors placing themselves in the market?
2. What’s their ICP (customer profile)? How does it compare to ours? 
3. Are you competing on price alone? If not, what else?
4. Do they offer discounts, promotions? Are, there additional fees?
5. What’s their annual revenue? Are they growing or declining?

If Netflix compared itself to its direct competitor, Disney+, a comparison might start off like this:

A competitive analysis helps you identify the distinct value and benefits your product or service offers relative to other solutions.

It's not just about a price, but communicating your value to the people that could buy your product.

Don't just let the output of your competitive analysis build dust. Transform your insights into actionable strategies.

Consider creating a Pricing Return on Investment (ROI) model that showcases your product's unique value proposition to your customers.

Now, let's discuss how to find out the kind of price point your target consumers are willing to dish out.

4. Ask your customers or target consumers

Who’s the most important group in all this? The people buying your product.

It's critical to understand your customer's "willingness to pay."

To find the right price point you need to know your target's demographics, like age, income, and location. And more importantly, their motivations, like brand value and urgency of need.

Demographics are typically easier to access. It's information you can gauge from your own customer data, market research, and social media.

For example, if you’re targeting 43-58-year-olds that live in regions with higher disposable income, that data could be grounds for a higher price point or markup:

But you shouldn’t solely rely on demographics. You want to also understand deeper motivations. What's driving your customers to really value your product?

Take King Charles and rockstar Ozzy Osbourne.

The pair share several significant attributes that could place them in the same customer segment if using demographics alone. But, it’s more important to segment people by their pain points and motivations.

These can be harder to find out.

You need to talk to your customers and people who fit your ideal customer profile (ICP). It can be through informal discussions or structured surveys and interviews. Ask questions like:

• How does the perceived value of our product stack up against competitors?
• Who holds sway in the decision-making process (aka the buying committee)?
• Which aspects take priority in their purchase choices (value, user-friendliness, accessibility, customer support)?
• What do they feel when using similar product? 

These insights will shape a more informed pricing strategy, providing a holistic picture of your competitive advantage beyond price alone. As Harvard Business School professor, Bharat Anand says in his course Economics for Managers:

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We often wonder why people might be willing to pay for a product when another seemingly identical one was available for a cheaper price or free. That shouldn't be surprising. Price isn’t the only feature that matters to customers. For example, legality, packaging, and brand name might matter as well.

5. Align your value proposition to your pricing strategy

Your value proposition is the level of your product’s worth, usefulness, and practicality that you promise to prospects.

Do you solve people’s problems the fastest? Cheapest? Do you use sustainable, high-quality material that no one else does?

You already know your competitors’ pricing and ICPs’ challenges. Now, you have three options:

1. Price higher as a premium product
2. Price in line with the market to beat competitors with value or market share
3. Price lower (positioning the product as a loss leader) to attract new customers

Your approach depends on the perception, differentiators, and quality of your brand and offer. Each comes with its own set of challenges:

• Too high, and you may be unaffordable
• Staying in line means more work to keep on top of everyone else’s pricing
• Too low may appear “cheap” and bring the whole market value down

Let’s look at streaming services Netflix and Disney+ again.

Netflix offers a vast and diverse collection of content, including a strong line-up of original programming. This variety positions Netflix as a hub for a wide array of entertainment choices.

The Disney+ value proposition is built on the extensive and iconic catalog of Disney, Pixar, Marvel, Star Wars, and National Geographic content. And, it appeals to a more family oriented audience.

Each service’s offer speaks to similar segments of the same target market with different value propositions.

So, how do their prices compare?

If we compare each provider's standard plan (with no ads), Netflix costs more.

Netflix standard (no ads) is $15.49 / month while Disney+ (no ads) is $10.99 / month.

But, if you compare Netflix to Disney+ Bundles which includes access to a wider range of content with Hulu and ESPN, Disney's price point is closer to Netflix when comparing their highest tier plans.

It comes back to value proposition. The higher the value your product delivers and the better you can communicate it, the higher price you can charge. 

So, you need to hone why your customers should pay this amount if you want to reduce friction and increase sales.

6. Use technology to build an adaptive pricing model

We’ve covered a lot of scenarios. And like we said, change is the only constant.

In a world where pricing can make or break a business, having a flexible and collaborative way to gather pricing data and adjust your analysis is crucial.

While many companies have traditionally relied on spreadsheets, they fall short in capturing the complexity of decision making. Pricing is not just about crunching numbers. It's about understanding the nuances of multiple factors that come into play.

Read our guide to find out why we believe it’s time to think outside the spreadsheet

This is where innovative tools like Decipad are reshaping how individuals and teams interact and communicate with data.

Decipad is an interactive notebook where numbers, narrative, and visuals come together.

With Decipad, you can build models that are not only easy for everyone in your organization to comprehend but also adaptable in real-time with new information.

Whether you're considering add-ons, upgrades, or discounts, Decipad makes it easy to fine-tune your inputs and see how they impact your pricing strategy. This level of interactivity empowers you to make informed decisions quickly and confidently.

It goes beyond the conventional spreadsheet approach by helping teams convey an evidence-based narrative, where metrics are seamlessly integrated with context. There are no walls of numbers here:

And, it enables you to present numbers in a more human way. For instance, you can showcase prospective customers the ROI they can expect from using your product. As we've stressed, pricing isn't just about a number. It's about effectively communicating the value you deliver.

In a world defined by perpetual change, your pricing analysis should be equally dynamic.

So, present it in a way that turns complex information into a dynamic, relatable format that your whole team can understand.

Make pricing decisions faster and more effectively

To sum it all up, pricing is more than just a number. It's about crafting a narrative of the unique value and benefits your product brings.

Customers are not just paying for a product, they're investing in a story of value.

To kickstart your pricing journey, we've curated a few of the best templates and real-world examples on Decipad, all crafted by experts, valued customers, and entrepreneurs.

1. How to Price Your Business: Configure costs and calculate your margin.
2. Hourly Rate Pricing for Freelancers: Set your freelance rates strategically.
3. How to Price a Consulting Business: Tailor your consultancy project pricing.
4. Competitive Comparison: Analyze Github vs. BuildJet for pricing insights.
5. Communicate Pricing ROI: Articulate the value return to your customers.
6. Dynamic Pricing Proposals: Close deals faster with dynamic proposals.

Your pricing story should be as adaptable and interactive as your business. To make this a reality, give Decipad a spin.