Pricing - When Is It Time To Stop Worrying?

posted Oct 8, 2013, 12:53 PM by Douglas McCartney

As a person who has spent years in a multitude of sales and marketing roles, I have spent a good deal of my time worrying about pricing. By worrying I mean researching it, analyzing it, modeling it, discussing it, negotiating it, and discussing it even more. I often felt it might just be time to stop the worrying, settle on a price, and then never look back. After all, how much more value could we wring out of the pricing question? However, my experience shows that while “putting pricing aside” for a time was often advantageous, in the end, time and again, the world at large proved that revisiting pricing is almost never a bad idea. It is just too powerful and too important to be taken for granted.

But How Much Can You Change Pricing Anyway?

One of the most common objections to revisiting pricing is that customers will never stand for it. If we increase our price, won’t they all stop buying? Well in some cases that of course might be true. But if we look around at our everyday lives, most people can find examples where that is most definitely not the case.

Consider for example a box of Cheerios cereal. You can buy a box at Price Shopper, Hannaford, or Whole Foods. Is the price the same at each store? No it is not. If you know the stores, you’d probably guess that the price across that continuum goes from lower to higher,  so why wouldn't someone always go to the lowest price store? Well the answer, as we all know, is ‘lots of reasons’. Because buying groceries is more than the price of a single item and the “value proposition” of any one store varies by individual. At the very least, it is sometimes nothing more than location. After all, you probably paid three times the regular store price for a candy bar the last time you picked one up at an airport kiosk or the theater, so price most certainly isn't the most important variable. Customers love to make you feel that it is, but we all know there is much more to a buying decision. And in the BtoB world, that is even more the case since you might not get fired for paying a higher price, but you could most certainly get fired for choosing a vendor that fails to deliver.

So How Much Change Can You Do?

This is again another area of push back, “Yes, of course we could change the price, but how much difference can that make.” Well the answer is, a lot.

One way to make a big difference is to simply change the price by a very large amount. I've worked with companies where we simply doubled, tripled, even quadrupled the price overnight. This can work particularly well in the BtoB world since pricing is often unpublished and there is often not a lot buyers who revisit their initial buying decision. Yes, support or other ongoing revenue “concerns” for your current customers may need special handling, but for new customers they don’t have the history to bog them down. Instead, they will assess the value of the offering on its own merit.

One of the oddities of pricing also works in your favor in this case. Research over the years has clearly indicated that the more complex a product, the more a consumer will use price as a gauge of value. What that means is, assuming your product is rather complex, the higher priced offering will often win because the buyer assumes the higher price option is better. After all, if you are charging 50%, 100%, 200% more than your competition, you must be doing a better job. .

Again, in our everyday life this is shown to be true again and again. You can probably think of your own example, but the Tiffany pricing strategy often comes to mind when I ask people this question. To me a diamond has a fairly clear set of rules and guidelines for assessing its value (it is, after all, just a rock), but Tiffany's always gets a premium. Now it takes a lot more than doubling the price to earn the Tiffany’s markup, but pricing is clearly part of the package (and is not just a simple byproduct) .  

Bundle and Unbundle

But as noted, premier pricing is not for every brand and every offering. So another way to play with price is to play with bundling and unbundling. Software is often ready made for this type of price changing, but I often like to suggest people stop at their local MacDonald’s to get the idea. “I’ll have a number 1” is a perfect example of using bundling to your advantage. The basic theory is simple, if you can’t get more for a Big Mac, then get people to buy more alongside it. Every invoice in other words, becomes a little bit higher. Ordering a “number 1” does help the line move faster, but to me it is more about the pricing than order efficiency.

In software, bundling can be very simple. Instead of selling single seats, have the price start with a dozen. I have used this approach more than just a few times and in at least one case we more or less saved the company from certain extinction. Too many customers were buying a seat or two and centralizing work. It was just killing the company where it counts most; their top line revenue. So we simply said every license is a minimum of four users. When that worked, we made it 4 add edit and 12 read only. The price went up, revenue went up, and customers got what they always wanted: a vendor that was still in business and providing more and better products and services.

Unbundling is just the reverse. Many companies start out by including pretty much everything a customer might need in a single offering. In today’s SaaS world, that is most certainly the case. But what was once included need not be included forever. How you handle current customers can be sticky and some customers may even make it unpleasant, but in general pricing changes that are fair and important to the company’s long term success are normally greeted with resigned acceptance.

And unbundling need not mean the separate components are optional. More recently I worked with a company that unbundled their services for new customers, priced them separately, but still made them mandatory. The net was a minimum 50% price increase for something they used to give away with the core product. In hindsight, what was happening seemed stupid, but in point of fact it wasn't. It’s just that things - and thus pricing - change.

Nothing is Forever

And just as it is true that any pricing model isn't “forever”, it is also true that no pricing experiment has to be forever either. You most certainly have to give any quality “experiment” a chance, but at the same time it is possible to recover from a bad pricing decision.

If you don’t think so, consider Netflix.

As I've heard other people put it, when you have a quality product and a quality offering you can and should expect a price that is a “good value” for your customer, but it is likewise totally unnecessary (and
unwise) to make your price a “no brainer”.