1. Be better, not cheaper.
If someone in your market doesn’t think you’re better, you’re a commodity and have no pricing power. If you’re small, you probably have less costing power than the your larger competitors. Commodity pricing + uncompetitive cost structure = working really hard + out of business. You have to be different and better to someone.
This is about benefits, not features. It’s about perceived differential value, compared to some other alternative(s). The buyer ultimately gets to decide this value, but you get to help set up the discussion. Many small business owners imply that their offerings are commodities. (“200 hours of Java coding” and “1,000 pounds of dirt” are examples I’ve seen recently on actual proposals.) Then they have to get into a defensive pricing discussion, and end up pricing below the real or imagined competition. Now your profits are down, your hours are up, your morale is down, and your stress is up. This is one of the big causes of the “E-Myth“, when business owners lose their passion.
The iPad isn’t the cheapest tablet. In fact, its average selling price is probably higher than the average PC selling price. How did other companies try to compete? They made something that was cheaper, with more features. But not better.
37Signals doesn’t make the cheapest CRM application or project management tool– there are free (free!) applications in those niches. They make better apps. And they have a very particular idea about “better.” They want their applications to be simple. They don’t compete on features. They are OK if you outgrow their solutions and need to move on to something more sophisticated. That keeps them focused on their small business market.
Mimiran has to provide a better way to create, send, and close proposals (shameless plug, but relevant to discussion). There’s no way to be cheaper. Small business owners already have email, a word processor, and a spreadsheet. Asking them to pay for what they do now for free (in hard costs, not in time) means there has to be some benefit (faster to create, faster to close, higher close rate, higher margin).
2. Price Appropriately
This is easier said than done, of course, but once you’ve figured out how you’re better, you can price, aligned to the value you create. When you know your market, your benefit to a subset of that market, pricing becomes more clear.
Let’s start with a negative example to illustrate how this can help refine your pricing strategy. An innovative manufacturing company had developed some factory tools with much higher durability than the competition. They priced them higher, based on the replacement cost of the cheaper parts. No one cared. The parts had a longer tenure than the line managers buying them. So the managers had no incentive to spend more money for savings that would never be realized on their watch. They shifted the discussion to how the better engineering reduced defects and downtime and realized the price they had aimed for based on durability.
You can move back and forth between your price, your offering, and your value to hit the right spot. For example, the iPad was engineered in part to provide a $499 touch computer. No camera in version one. (Oh, and you want cellular data? That $5 part will cost you $130 extra dollars.)
37Signals prices their Basecamp project management app based on the number of projects. Print shops charge a hefty fee for expedited work. You can even offer discounts, when appropriate. Restaurants and movie theaters offer early bird specials to get people in during off-peak times. (Why don’t more accountants do this?) Many consulting firms offer discounted retainers that provide them with predictable revenue and customers with cheaper services.
So if you’re wondering how you should price, think of these 2 sentences. If you can answer clearly how you are better and for whom, they go to step 2 and price based on how you are better. Try not to get too wrapped up in your idea, your company, your product. The market doesn’t care. Think about your customers, their wants and needs, and how to help them. Think about why they should choose you over their next most likely option (which may simply be “do nothing”).
Anyone have good stories about this that they’d like to share?