Pricing
At some point, you’ll likely need to price your own shit or figure out if someone is trying to pull a fast one on you. For simplicity, this is written from the perspective of a seller, but these lessons apply in both directions.
Ultimately, pricing is about risk management.
To make sure you don’t fuck your business up, here is a methodology for thinking through the risks in different situations. Eventually, this should be unconscious.
Endgame
That’s right. Endgame right up front.
Understanding where you want things to go is critical to avoiding short sighted decisions that will fuck you over.
- Do you need cash fast so mafia loan sharks don’t kill your family?
- How reciprocal will this become? Cutthroat? Partners?
- Is this customer going to be a major source of income this month? this year? Next year?
For example, starting under priced with a new customer could get you in the door.
Disclaimer: undoing discounts is tricky. Nobody likes paying more today for something they paid less for yesterday.
Either, you can force them to acknowledge that the thing is actually worth more than they are paying so that they can stomach it next time, or you can focus on offering things that are similar but not identical to the past.
For example, if you sold your first Bassoon to them for $500 ($1000 with a 50% discount), you might try selling a Gold Reed Bassoon for $700. Or, perhaps you sell the same Bassoon but this time you add in pages of sheet music for $550 or access to your online video lessons.
Generally, the same thing typically goes down in price over time. There are some exceptions where general costs rise over an entire market, but the cost increases are small and extremely gradual.
Typically when you see big increases in price over previous offerings, there are new features, benefits, services, etc. attached.
If you have a current customer that you’re trying to retain, get them to commit (in writing) other spending to you if they are being particularly demanding about low prices.
If they refuse, start to gather data about what their fears are and/or what they expect would actually be as valuable as what you hope to charge. If they are an outlier client, maybe time to terminate. If lots of clients seem to not understand or tolerate your prices, you’re the problem.
Structuring
Fundamentally, everything people pay for is work being done (i.e. a job).
If the job is done by a person, it’s usually a Service. If the job is done by anything else, it’s usually a Product.
Here is a basic overview of different pricing types, risks, and common uses.
| Type | Risk to Customer | Risk to Provider | Common use |
| Fixed fee | Overpaying | Perception of rip-off | Well defined services |
| Hourly, T&E | Project over budget | Margin frozen | Poorly defined services |
| Hourly with cap | Minimal | Maximum | Services with limited budget |
| Flat subscription | Underuse | Overuse | Predictable ongoing use of a product |
| Consumption based | Unpredictable | No commitment | Unpredictable ongoing use of a product |
| Outcome based | Difficult to measure | Difficult to measure | Strategic product or service offerings |
| Negotiable purchase | Time | Time | Bespoke product sale |
| Standard purchase | Research | Competition | Off the shelf product sale |
Each time you price something, consider keeping multiple options on the table for the buyer:
- What is ideal?
- What are you willing to accept for your endgame?
Let’s say you want fixed price. Your buyer wants hourly. Try estimating hours needed, and marking down the fixed price version. Would they pay 20% more for you to take on more risk? 50% more? If they do, do you care?
Or, try holding them to larger increments, like 1-day or 3 day chunks instead of by the hour.
Think of each lever as a slider. Give three options to your buyer. All should be acceptable to you. Spend your energy moving them toward the most favorable option.
Once you get your basic shit figured out, it’s time to get into adjustments.
Opponent
Typically, the thermodynamic laws of a deal are:
- When $ meets buyer’s expectation of value, buyer is chill.
- When $ meets seller’s expectation of compensation, seller is chill.
First think about the institution on the other side of your deal:
- How many employees do they have focused on your offering’s area? What are the salaries like? Do you think their software budget is 10x their total cost of payroll? Hint: Absolutely fucking not.
- How successful have they been lately? What would be a big win for them?
- Are they into a long term partnership? You could say, for example, “I’d like to be delivering $100,000 of value to you by next year. I think that we could deliver x, y, z – are there other things we could take on for you so that it’s an easy decision for you to spend that with my firm?”
- Have you worked with them before? Do they know people familiar with your work?
Think about where you fit:
- Will your offering help them make money? – Consider an adjustment to reduce the money you charge up front, and get paid more as they grow.
- Is your offering a necessary cost for their business? – Focus on how you can keep the cost the same or even lower over time without sacrificing quality or effectiveness. You might achieve this by automating some of your work. If you do want growth, think about what additional work you can go after for them each year.
It helps to know who is individually on the other side of your deal:
- What happens to them if this transaction crashes and burns?
- Are they experts in your industry?
- Have they purchased an offering like yours before? How often?
- What has frustrated them in the past as buyers?
Alternatives
The term “competition” makes people think myopically about people who offer what they offer. In reality, deals are lost to many other things.
Your next adjustments should be based upon their realistic alternatives. Remember that in all these scenarios it is about what they perceive.
Not what you think. Not what experts in the field think. What does that individual believe?
- If they don’t buy your shit, what else would they go buy?
- Could they pay someone $10/hour to do something good enough?
- Could they spend $5 on Fiverr or Etsy to get what you’re offering?
- What jobs are they hiring for related to the work you are selling?
- What are they paying employees that are at the level they perceive the work to be* on Glassdoor?
*Just because you are CEO of Bessie’s Bespoke Bassoon Boutique doesn’t mean that the task of copying sheet music is CEO-level work worthy of $5,000 an hour (or whatever the current CEO pay for bassoon-focused entrepreneurs is).
Market rates go out the window when people believe they could use their employees to do the work. Research your buyer(s) to figure out what people are actually spending. If you are off by an order of magnitude, and can’t successfully differentiate in their eyes, expect to lose.
Get real about what the lowest skill, cheapest person could do to create work that looks like what you are providing to an uneducated buyer.
Differentiate
What would your buyer say makes you special? How much is that actually worth to them?
If you can’t answer why a buyer buys from you as opposed to using any of their alternatives, you run the risk of losing them.
For example, perhaps your copies of evidence of their casual money laundering are very valuable. Or perhaps institutional knowledge of the company’s quirks get you a $100 hourly rate. Or trusting personal relationships mean they accept your first offer.
Each edge is grounds for a price increase. Each thing that the buyer doesn’t see as different from their alternatives means a price decrease.
If they reply with an insultingly low offer, ask them about their alternative. Depending on your endgame, if you aren’t just after the immediate dollars, you could focus on making it easier for them to get their desired alternative.
For example, if you tell them your Bassoon is $500 and they tell you they can get one for $50 on Ebay, offer to use your unique specialized skills to find them the perfect one on Ebay for $55.
Solve a problem conveniently for them and move on to educating them on other offerings or attributes that make you uniquely valuable. Sure, you make zero up front, but perhaps for your endgame, that math is fine.
Close
Ultimately, you can be as brazen as your options allow you to be.
But, before you walk away from a mismatch, try to figure out why they are hesitant to pay and work down the risk for them. Or, figure out what they would consider valuable enough for you to charge what you want, if anything.
You can get creative with pricing. You can be really rigid about pricing. It really depends on your Endgame and where your business is in its journey.
But above all, you need to be able to handle objections appropriately and understand what a buyer really means when they say no.
References
Some useful articles on pricing:
- https://medium.com/@bretwaters/unit-economics-b347990f839b
- https://www.reforge.com/brief/how-saas-companies-price-their-product-growth
- https://medium.com/looltalk/get-customers-to-love-your-pricing-in-10-steps-ee4adbfd63d4
- https://labs.openviewpartners.com/saas-pricing-insights/7/#.W3mdai2ZPMJ
