How to make sure your pricing is on the money

How to make sure your pricing is on the money

Wondering how to get your pricing right? Read on.

There are a number of aspects and best practices that you should consider when pricing your products or services and that’s what this blog is about.

Here are some of the best practices that you should review and apply to any pricing decisions that you make. The list is far from exhaustive, but it includes some principles that the Dearin & Associates team has used successfully over the years.

Power of 9s

There have been repeated academic studies that have identified ‘charm pricing’, where certain aspects of a price will lead to higher conversion by customers. The power of 9s is a big one, as no matter the price, the number 9 conveys a sense of great value. As an example, multiple studies will show that people will buy the same item at $7,990 in comparison to $7,450 or $8,250. Leveraging on the brain’s psychological bias may be a major profit generator.

Small Numbers

The same can be said for using smaller numbers to sell things as well.

Out of the following, which feels the best deal to you?

  • 60c per hour
  • $12 per day
  • $80 per week
  • $350 per month
  • $4,000 per annum

Most people probably think 60c per hour is a great deal – it’s just spare change right?

Wrong… 60c per hour, times by 8,760 hours in a year, would actually equal $5,256.
This is more than 30% above the $4,000 per annum amount.

What this means is that where you can price on smaller units, do. Your customers will see greater value.

The same pricing principle also helps push back against discounting: most customers will struggle to argue for a discount of cents on 60 cents. It is much easier to ask for 10% on $4,000.

Breaking Down All Elements

For most enterprise software you will see module pricing and multiple different components to the pricing. This is another ploy to defend the value software companies are seeking to extract.

If you offer a customer a $190,000 per annum contract for service, they see a very large number. They will typically look at this as 2 FTEs of staff. Their natural inclination is to think that two staff members will be able to deliver more value.

If you present it broken down into 6 components at $35,000 per annum each, this seems far less. The service is delivering value across 6 areas at much less than a staff member to focus on each one. It is also easier for customers to see how each component could be provided by a single competitor and that at each component level you will likely compare favourably.

If you switch this to $3,000 per month for each of the 6 components, you are further reducing the total value into almost insignificant amounts.

Once again, this approach also helps defend against discounting:

  • $19,000 off the $190,000 is meaningful
  • $300 off the $3,000 seems hardly worth the effort of asking

Of course, for those with the mental calculator, at $3,000 per month, we are at $216,000 or a 13% premium.

An important element of this is your service and support costs. Make sure you break these out as part of your total price. Simple pricing in these use cases just works against you.

Offering Three Options

You will see time and time again companies offering three versions of their product. There is copious academic evidence that buyers will break down along the following lines:

  • 20% on the lowest option. These are buyers that are “Cheap” and will only ever select the bottom offer.
  • 75% the middle option. These are buyers that don’t want to be seen as cheap. They also are valuing the difference between the products (even if they won’t necessarily provide them any value). 
  • 5% the top option. These are buyers that will always select the top option. They believe that gold wrapped chewing gum for the support technicians makes a difference.

This has been proven time and time again. Use it for your own purposes…wisely.

Pricing Complexity

Anyone that has ever tried to price hosting on AWS will know about this. AWS uses a bunch of these principles to create significant complexity. It is ridiculously difficult to predict and model. Customers feed in their low case assumptions to get a number that works for them. Their cost is typically always more:

  • They consume more than they expected
  • They didn’t include certain elements

Salesforce consumption charging of APIs is right out of this playbook. It is nearly impossible to model how many API calls you will need to make once your Salesforce instance is in place. However, once you have it in place, your switching costs will prohibit migrating away. The insidious aspect of this is that as you bring more data into Salesforce and more integrations your API calls go up … and you are further locked into the platform.

So, if you want to price your product anyway that helps customers to identify and accept the value of what you offer, think about using 9s and small numbers, breaking down all the elements of your offering and offering multiple options.

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