Pricing is a fact of life. One of the things I have encountered more than once is how to price new products.
More often than not, it freezes people. I have narrowed the reasons why down to:
- Afraid to leave money on the table
- Afraid to de-value the product
- Afraid to set a negative precedent with other clients
- Not knowing what to do
The way most folks deal with this is to hum and haw over the “perfect price” and usually end up getting it way wrong. Complexity after complexity gets layered on to entice the client to sign on – when in reality, when pricing something to market for the first time, you should be less concerned about tiered discounts and price breaks.
You have to tell the prospect something. And surprise, there is a very easy way to do this:
New price = cost * x-factor
I generally start at 10x and drop the x-factor down from there until I arrive at something that feels right.
You need to understand and estimate the cost to provision of the product, and then multiply that to what you feel is reasonable (plus a little bit more). There is a pricing strategy called “skimming,” which is what you have to do to find the right spot to be in.
But, usually (not all the time based on the scenario) you want your sale to make the company a profit. So, when multiply by the x-factor, make sure it leaves your Sales team enough padding to discount if they feel it’s needed to close, but won’t cut your margins down to be razor thin and you end-up pinching pennies internally to get the product to the client.
You may find that the response to the new price is negative. Folks in your pipeline may tell you it’s way too high; and that’s OK – remember, you want to skim initially. It’s way easier to drop a price than to raise one. To put it another way, you don’t want to go to market with a horrible pricing strategy and realize you have had 10,000 people buy your widget but your cash flow positions are still awful.
That would be bad.
Maybe you have a pipeline of 500 prospects – 10% of them buy at your skim / first pricing attempt. 30% (provided of course they are in your target market you have identified an opportunity in) tell you they would buy, but the price is far too high. So, start pricing down until you hit the sweet spot. If you run in to a situation where you have to price down so far you end-up losing cash on a transaction, you can either:
- Acknowledge you have a loss leader and re-assess accordingly
- Re-assess your cost structure and re-price
But don’t get overwhelmed. It really is this simple: price = cost * x-factor. Start with that and then you can get into heroic-like / super complex pricing schemes and variables later. If you can’t find a price this simple way, you certainly won’t be able to find a price in a more complex way.
