Earlier in this series, we explored what not to do (cost-plus pricing) when building your pricing strategy. Now we lay out what to do.
Look at what your competition is doing, and bridge the price from there. If you don’t see any direct competition, consider the current cost of the pain point. Or, to say it another way, employ value-based pricing. This is also a good time to examine your value proposition: most potential customers will have a hard time buying into theoretical savings, especially in B2B transactions. When you pitch cost savings such as reduced staff attrition or increased efficiencies with a better culture, your client’s CFO won’t be buying in. People know staff turnover is very costly. They know a bad culture is very costly. What is almost impossible to measure is the value of improving these—and determining whether that improvement came from only one thing. The reality is that in these situations, you are selling the fact that someone wants to try something new or cool and then see how much they could spend.
If you are selling to companies, one strategy is to keep your price or structure your price low enough that the buyer can put it on a credit card and expense it. Instead of pitching your solution to General Electric, try selling it to a sales manager to use for their team, and let the word spread, with each manager individually buying the solution. This avoids the hurdle of getting the procurement department involved and having purchase orders signed. Most people don’t want to put that much effort into trying something new. Remember, this is also an experiment on their part. At some point, you’ll have evidence that individuals in the company see value, and then you can approach the company as a whole—and get ready for a large discount request from procurement for the new “volume” they will give you.
The key to the experimentation model is speed. You need to learn, respond and adjust quickly. This is a top advantage startups have over larger ones, so leverage it.
There is a point where what you should do (experiment) and what you shouldn’t (use cost-plus) intersect. Once you have set your price, compare it to your cost. Does your business model work? If not, re-evaluate your costs first. As hard as it is, it will always be relatively easier to adjust your cost than it will be to try to educate your customers on a value they don’t initially see or want to pay for. Look at lowering design costs, removing functionality, changing materials or saving some high-cost features for a later upsell. If you are selling a service, you need to ask yourself if you can hire less expensive people or if your margin expectations are too high. If you are selling software, your direct costs should be very low, so this shouldn’t be a problem, but you will have to look at the overhead (fixed) cost of your organization.