Creating your pricing on a napkin from day 1 is a memory start-up founders reminisce over as they reflect on how the business was built.
The truth is, no matter how big the firm gets, pricing today is still largely based on management hunches, firm overheads, competitors’ moves & the pressures of sales targets.
In the B2B tech world, where a ‘product’ is sold, pricing based on costs is still what many firms rely on.
Many are still unable to get under the skin of the end-audience to utilise insight into their pricing.
So how is a price point anchored in the wrong place, or an unstructured pricing method hurting your business?
You’re leaving money on the table
The most obvious example of inadequate pricing & its impact on the business is that if you are pricing at a too high level, you are driving the market away & restricting growth with new & existing prospects.
Or on the flip side, if you are pricing below the market, you are leaving money on the table.
You may think that a cheap product is an immediate way to capture market attention, but in a field like Financial Services, a cheap product might send immediate alarm bells on the quality of the product & team.
Pricing matters, especially to your bottom line – a 1% price increase typically delivers 11% impact on profit (PwC, 2018).
You’re burning money & time
Are you pricing by having your sales team in a meeting room to discuss & negotiate the accurate price point for a client based on the prospect’s firm size, assumed budget & gut feel? If the answer is yes, then you are burning money & time.
Every second spent discussing the appropriate pricing is an opportunity cost.
Determining your pricing in this way could also cause repetitional damage if your pricing amongst clients is inconsistent.
Holding yourself against competitors is capping your potential
The most obvious route to determine your pricing that many have relied on is pricing based on your competitive market.
This is ineffective in a market where you are trying to do something innovative & disrupt the existing market – how do you price for something that has never been done before?
The firm’s potential & growth is essentially held back by the pricing of their competition & isn’t the aim to out-perform the market?
The answer is to always sell something that can’t be compared on a commoditised basis.
So, now that you understand how your pricing is hurting your business, how can you turn that around & use your pricing as a tool for success?
Tying your pricing to the strategy of the firm
Look at your pricing framework as a commercial architecture within the firm.
It should be structured in a way that aligns with your strategy & enables the team in a way to achieve the objective.
For example, if a start-up is trying to break into a new market & has no experience nor gravitas in that existing market, the pricing should consider & include certain discounts to increase the chance of success.
The pricing structure should have sufficient flexibility to take those considerations into account.
Use your pricing to drive focus to the target audience
Pricing modelled in the right way should act as a framework to help the sales team remain laser focused. The ideal sales scenario is to have endless opportunities to choose from, and when the business is in that state, the right pricing structure should help the team focus on which opportunities would deliver the right results for the business.
For example, if your target audience is Regional Banks then the pricing deduced for a Tier 1 should be exponentially greater than for Regional banks. Not because of the firm’s size, but because signing a Tier 1 & managing that process would defer you from your main focus. Pricing should incentivise the right audience to sign with you.
Pricing based on the value vs the cost of the business
The propensity to pay is key when determining effective price discrimination across different segments. This requires companies to be close to the customer & to understand the levers which will drive price discrimination effectively. This is the only way to build a framework that incentives sales.
What is the ROI your product is expected to generate to the market? Too many in the market price against a margin rather than value & ROI to the client. Jon Lerner of Smedvig Capital highlights the importance of this: “B2B firms, from small to SMEs, have typically transparent pricing, so the pricing becomes part of the overall value you propel into the market. It is binary: people will buy or they won’t, so you must prove your value”.
For example, if your product is going to reduce overheads by 10%, why are you selling your product at a set price of 2k per month, instead of 1k per month + 2% of all overheads costs reduced at the firm?
Finally, pricing without thought to overall value proposition is nonsense
At the very least, your pricing should be tailored to the mechanisms of your business, whether that means you price per person, per transaction etc.
However, beyond that, the buyer behaviour & customer’s willingness to tolerate a certain price point will be largely driven by how the overall value proposition is framed.
No matter how robust your pricing structure is, if it’s not framed in the right way during your sales process, it’s essentially pointless.
