How Much Are You Worth, Really?
Bottom line: making money is hard. Because building something people want to pay for is hard. And at some point in every company’s journey, you must decide what to charge. How do you do it?
This is especially challenging for startups, which may offer a product without precedents or even direct competition. How do you know what to charge for something that didn’t exist before you thought it up?
Determining the Right Price
Pricing is so important, Fortune 500 companies have entire departments dedicated to it. These are literally rooms full of people doing nothing more than trying to create rationales for what their company’s products or services should cost. Why? Because the right price boosts profits exponentially: a one percent improvement in price can increase profits by twelve percent or more.
As consumers, we are certainly aware of what things cost, and often have an intuitive reaction upon seeing a price. If you are the company making that product, in most cases, you have some frame of reference.
Every company must decide where they want to fall on the price spectrum, and how to justify what they charge. Should they charge more for more features or higher quality, or do they want to charge less because of some built-in advantage, or by offering less features?
It’s About More than Consumers
But pricing isn’t just about what consumers will pay. It is also about what a company wants to make. There can be a huge difference between “This is what it is worth,” and “What do we need to charge in order to make our desired margin?”
Every company hopes to find the sweet spot where people will pay more than a company wants, or more importantly, needs. But what happens when a company’s desired price exceeds what the market is willing to pay?
Companies then have to either make a better product — which is hard, and takes time — or figure out tricks with pricing, which is much easier and faster.
We all know these tricks when we see them. Some are innocuous and not necessarily nefarious, such as offering discounts on annual subscriptions. Others are purely for for the purpose of improving margins: minimum commitments, penalties for quitting, rounding up, pay us to remove our branding, even separate fees for processing and handling.
My Own Experience
One company I advise recently began its pricing phase. It is an SaaS platform in an industry without many SaaS players.
This lack of direct competition was concerning to all, because it meant the market might not initially tolerate a premium price. Without precedents, potential consumers have not been anchored and trained to pay a certain amount for a service that will add immense value, but for which they don’t yet know how to pay.
This is when you dip into your bag of tricks. Our conversations quickly turned to what companies in other domains do (there is no playbook, so we could only observe): charge setup fees, monthly minimums, cancellation fees, and so on.
Each part of pricing became a means to achieve both a minimum amount of money out of a customer (set-up fee, term) or the absolute maximum (cancellation fees, billing periods). None of which is necessarily bad, especially in light of customer acquisition costs. But at some point during the conversation we stopped thinking about what would work for the customer and what felt right to them. If we were there to help solve a big problem, our pricing should be aligned to the company mission.
In my opinion, pricing conversations are really just product conversations. We must understand the difference between building something people want to pay for and building a compelling product that people actually want to buy or use (with the exception of seemingly “mandatory” products like CRMs for their integrations or certain broadband providers).
Simply put: If you can build something people want, pricing becomes a much easier conversation. To that end, we shouldn’t initially focus so much on price as though the customer can’t live without us. At least not until we know they can’t.
Fortunately, technology also makes it much easier — almost instantaneous — to gauge the early effects of a pricing decision. So while building something people want to pay for is still hard, with the right tools and tricks, the entire process can be made a whole lot easier.