The right pricing model is a key to winning customers, achieving better bottom-line and prevents the post-sell depression.
While sales numbers, fixed costs, operational expenses gain most of the focus in determining profitability, the difference made by right pricing model is way higher than all the other parameters.
The question “What if the customer says price is too high?”, has a deeper impact on seller due to their anxiety of acquiring the customer.
When it comes to pricing, everyone from the team has a view on it. This is because pricing is a very perception driven number. The price needs to be framed in the context of other parameters internal (e.g. costs, features, aspirations) or external (e.g. competition price, customer’s budget) – for you to be able to rationally qualify what number is a “High Price” and “Low Price”.
I have observed 5 pricing psyches that become a killer for the offering:
Aspiration, gut or target based pricing: “We must price at X to achieve Y”
Cost plus margin pricing: “Our Cost is Y so we must price at X”
Competition driven pricing: “Competition charges Y so we must charge at X”
Anxiety, fear driven pricing: “If we say Y, they will not do business with us, let us say X”
Zero pricing: “Let’s offer this at free of cost”
"We attempt to solve many challenges with pricing and that leads us to believe in to unworkable pricing methods."
some examples of such challenges,
“We shall attract more leads through this pricing”
“We shall quickly close the deal with customers with this pricing”
“We can avoid long negotiation discussions with this pricing”
“We shall create in-roads to up-sell and cross-sell with this pricing”
From the buyer perspective, these are disconnected parameters to look at pricing.
Pricing is an art and science. It is a critical and super-connected component alongside positioning and promotion.
Rationality in the pricing model and numbers provides a measurability of its success and provides a key for calibrating it.
Identifying following parameters helps make right pricing model decision and gives rationale to the decision:
What features of your offering have highest benefits for your customers?
What is their willingness to pay?
What is the value of what you are replacing/ creating an alternative for?
Can you quantify the (economic) value of each benefit that your offering delivers to customers? What is it?
What numbers fit into your overall growth roadmap?
These ingredients are critical to the pricing setup, validation, and negotiation simulations.