Toyota Aygo via Wikipedia courtesy of Rudolph Stricker
Value pricing
Now we all know (I hope) that when we offer a knowledge based service we bill for value. So if you deliver a huge cost saving to a manufacturing business by helping it re-source its raw materials you should charge it according to the value it receives in savings. If you offer a brilliant marketing solution that saves your client £50,000 a year you might charge a fair percentage of the first year’s savings and try not to be greedy of course.
When I worked for a large firm of accountants a client was charged £50,000 for saving £500,000 a year. The delivery cost was about a tenth of the fee, but the client was very happy.
Product pricing
However, if we are delivering a physical product or a program we need to be careful because our customers have a choice. I have an issue over some software. I like it a lot and have been a customer for years. However, the number of separate clients in its database has now exceeded a certain number and I have to upgrade to “unlimited” from the number of clients I have been paying for, rather than have another increment in numbers and another limited extra amount to pay for my software license. This means I have a huge hike in the cost of my annual license for this software.
You might say that as I like this software it is worth paying the extra amount, but of course it increases the cost of running my business rather more than seems sensible.
Jumping the ship?
Rather than buying the top-up to the license I have purchased a small limited license from a competitor for the extra number of clients I need. You know what? This software I am trialling is rather good. Also, if I were to buy their “unlimited” license it would cost much less than the unlimited product of my current main supplier, by which I mean some hundreds of pounds.
What do you think I will do? Well, it is most likely I will make the switch. I understand that my data can be moved over to the new program. I am not going to name names of software providers. It is just that if the price structure of the current provider were more sensible I would not even be thinking of leaving them, but why would I pay a huge amount of money for capacity I don’t need? It would be like buying a huge turkey for Christmas and at considerable expense, just for my wife and me. We would never eat it and would be sick of the sight of turkey before long.
Price comparisons
What I am driving at is that if your product isn’t a lot better than other people’s, you cannot charge a load more for it. Even if it is better, it has to meet the customer’s need. If you can buy the same product cheaper at Aldi, why go to Waitrose? Well, I concede you might enjoy the Waitrose experience, but you wouldn’t pay hundreds for it; at least not all in one go.
Why pay more for a Peugeot 107 than you would for a Citroen C1 or a Toyota Aygo? You wouldn’t. They are basically the same car doing the same thing.
So your product must be better than the others and it must meet the customers’ needs without their feeling they are spending money for something they don’t need. Because they won’t spend that money if you don’t get your pricing right.
