Complex Pricing Question

636px-20_questions_1954Here is a question from a reader.

Hi Mark,

Thanks for your newsletter, which I read with interest.

I have a problem with my pricing. I run a software company and am getting some nice orders from huge companies, mid size companies, and even independent contractors — so there’s the entire spectrum of customers there. But I can’t help feeling that I’m vastly undercharging.

Some of my products have no competition. I know this because my customers tell me so — they’re usually so thankful they’ve found a particular product (some can save them hours and hours of work).

I got a really nice order from a multinational company recently. That sort of thing should be a game changer (because it doesn’t happen often). But because I’m so inept at pricing, after the discounts they wangled, the whole thing only came to several thousand dollars. I’m sure if I knew what I was doing it could have been 4 times that.

Anyway, I’m rambling here, but I feel I could really do with some sage advice, and the sooner the better, because technology changes fast, I don’t know how much longer my products will have any value, and I feel I’m losing some great opportunities.

Can you help me?

I replied to him that with his permission I would answer as part of the blog, but I also said the answer was to raise prices.  Here was the relevant part of his reply:

The thing about raising prices is that I would lose the independent contractors who also buy my products, I fear.

One thing I noticed, though, is that the bigger players rarely are able to buy directly off our website using our standard e-commerce gateway. They tend to need to use 3rd party vendors, and have other paperwork requirements. So I tried a little market segmentation by stating on the website that the advertized prices are “for online purchases only”. That has helped a little. But so far only by a small price increase. (I mean, how much more can I really charge a company for not buying directly off the website!)

So if you could cast any of your sage light upon this, I would be really thankful!

-Al

What a great question with many different teaching points.

First, notice this is a Will I? type product.  He says, “Some of my products have no competition.”  That is the ultimate statement for a Will I? product.  People who buy Will I? products are not that price sensitive.  That’s why in my first reply to him I quickly said the answer was to raise prices.  Al replied he’s afraid of losing his small customers.

I’m not so sure that’s true.  If he really has no competition and his software saves people hours and hours of work, what would they pay to save those hours and hours?  Suggestion 1, go through the list of products and any product that does not have competition, raise the price.  Start with a 25% price increase and see what happens to sales.  I predict they don’t change, but they certainly won’t fall off anywhere near 25%.

Second, let’s talk about negotiating.  Big companies have professional negotiators.  They know how to beat vendors up.  Small vendors are sorely outmatched.  However, if this is truly a Will I? product then Al shouldn’t have to lower price at all.  He should hold his ground.  Surely they threatened that if he didn’t lower the price he wouldn’t sell any units.  They also made up some story about competition or alternative way to solve the problem. None of these are true.  Once the users decided they needed this product, procurement’s job was to buy them at the lowest possible price.  They will say anything to get a better price. (They use many more tricks than just these.)  In this case Al has to have the confidence he has the only solution for them.  It takes confidence and guts to hold on price.  But 9 times out of 10 he will win, especially if he knows he doesn’t have competition.

Third, let’s talk price segmentation.  Al is absolutely thinking along the right path, how to get different buyers to pay different prices.  I’m going to throw out several suggestions he may be able to make work.  Maybe some of our other readers have some other ideas they will share.  In the end, Al will have to decide what works for him.

  • Consider creating different products for different market segments.  What makes the product super valuable to big companies where it isn’t so valuable to small companies?  Is it the amount of usage it gets?  He mentioned that there was a request for a small feature enhancement.  That may not be enough.  He should be looking for ways to create two different products.  Maybe he could limit the number of times per day it could be used.  Or the total number of times.  Then he could charge by usage.  What he is really looking for is the capability that is highly valued by people who are willing to pay more, but is not highly valued by people who are price sensitive.
  • Consider raising the prices dramatically and then offer a substantial first time buyer discount.  That way anybody who wants to buy a single unit gets the current low price.  Anybody buying multiple copies pays the new higher price.
  • Similar to the above, he could raise the prices dramatically and then have a statement that says something like, “Less than 10 employees?  Ask about our small customer discount.”  Then the lower price isn’t even on the web site.
  • Consider bundling the products.  If he bundles he could create good, better, best packages.  Al’s good offering should be more expensive than the most expensive single item.  All of the packages should be less expensive than the sum of the products in it.  However, he could dramatically increase the unit price of some very slow moving products which will give him more room to increase the price of the bundle.  Bundling will get more people to buy more products even if they won’t use them.
  • More ideas???  Readers, help me out here please.

I hope this helped all of our readers, but a special good luck to Al.  If any of you have a question you’d like me and our pricing community to answer, feel free to send it in.  These are my favorite blogs to write so don’t be shy.

Photo by DuMont Television/Rosen Studios, New York-photographer.  Uploaded by We hope at en.wikipedia – eBay itemphoto frontphoto back, Public Domain, https://commons.wikimedia.org/w/index.php?curid=16489974