You and I suck at pricing.
Let's be honest. Most of us just aren't that great at pricing. We fall into, at least most of us, into two camps. People who price based on a cost plus profit margin approach, and people who price based on what everyone else is pricing. These are only two strategies, yet they're the ones most of us use.
Why is that?
I think it comes down to insecurity.
That's my personal take. Because with those two strategies, we can confidently respond to people who question our pricing. We can explain that our costs are X and we're only making a 15% profit (can you begrudge us our need to eat?). Or we can point to everyone else and say “see—they're priced the same way.”
Both of those answers come from our insecurity to know what we're worth, and what value we're bringing to the table. So we use strategies that allow us to at least justify our response.
But wait a second. Let's look at some pricing examples for just a second. Consider the following:
- First class seats in an airplane.
- A suite at the Ritz Carlton.
- A $140 pair of running shoes.
What do you notice? Here's what I notice – no one selling these things even tries to justify their pricing. It just is what it is. There's no one to talk to when you think that first class should be cheaper. There's no one to talk to about the Ritz Carlton's pricing.
Because they don't feel the need to justify a response. So they pick a different strategy all together: value-based pricing.
But this isn't a post on value-based pricing. This is a post on why we all suck at pricing.
The other reason is that we're bad at math.
I often ask people if it's worth it to raise prices by 10% if they know it will lose them 10% of their customers. They say it's the same. But that's not true.
Let's take a product (like a WordPress plugin) that costs $10. And let's say we sell 10,000 of them yearly. The total revenue is $100,000. And if we pay ourselves to build and support it in that year, we cost $75,000. So our profit is $25,000.
Now, let's change the price to $11. And sell only 9,000. Our total revenue is $99,000. For a second it looks like this is worse. But wait. Our cost to support it goes down, doesn't it. Because we have had less customers. Whenever our volume goes down, our internal costs must go down too. So instead of supporting it at $75,000, it will cost us $67,500. And the profit on that is $31,500.
Yes, it's true we're insecure about pricing. But we also don't do math well, and that results in poor pricing strategies.
So what can we do about it?
Well, you could go get a PhD in pricing. But that's going to cost you $70,000. You could hire a pricing consultant to help you, but that will cost you $10,000 – $30,000. You could buy pricing books, but you'll likely spend $600.
Or you could join me for an upcoming webinar on pricing.