Pricing Methods and Tools
Matrix of Competitive Advantage (MOCA)
MOCA is a tool for identifying and articulating your product’s benefits in meaningful terms to customers. On the y-axis, list the relative importance of your innovation’s benefits to customers. On the x-axis, rate your innovation’s performance against the competition – from your customer’s perspective. In your value communications, emphasize the benefits your product delivers that are most important to the customer and that competitors can’t match (top right quadrant) and be prepared to defend your competitive disadvantages (top left quadrant).
Price Elasticity Curve
Also known as the demand curve or price-demand relationship, the price elasticity curve shows how much the sales volume of your product decreases and increases if you move your price up or down.
Price elasticity = change in sales (%) / Change in price (%)
As an example, the chart below describes a product launch. At a price of $100, you would sell 1 million units per period. If you charge less, sales go up (1.35 million at a $70 price point). If you charge more, sales go down (to 600,000 at a price of $130).
With that information, you can calculate revenue (price x volume). By factoring in the variable cost of $50 per unit and the $25 million fixed cost for your factory and staff, you can now calculate profit (revenue – cost). The table shows the profits for the seven price points.
To maximize profit, you would set a price of $110. While your volume would be 10 percent lower than if you charged $100, you would make up for it with a higher margin per unit. But if you wanted to maximize revenue, you would set a price of $100.
Willingness to Pay (WTP)
To build a product around a price, you must engage in deep “willingness-to-pay” discussions with potential customers before you begin building your product. Doing so will help you understand the product’s monetization potential, prioritize features to include in your design and avoid common product design traps. The simplest way to discuss pricing with customers is to ask direct questions about the value of your product and its features, for example:
- “What do you think would be an acceptable price?”
- “What do you think would be an expensive price?”
- “What do you think would be a prohibitively expensive price?”
- “Would you buy this product at $XYZ?”
Follow each question by asking the most powerful question of all: “Why?”
Methods for Having the WTP Conversation
Method #1: Direct WTP Questions
First ask, “What do you think is an acceptable price?” Next ask, “What do you think is an expensive price?” And finally, “What is a prohibitively expensive price?”
To view four more methods, buy the book and see for yourself!