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EG50: First principles of pricing for software services [recap]

Written by Emanuel Martonca
on May 23, 2022

As this is the 50th issue, I thought it would be useful to do a recap of the ideas, concepts and tools that have received the most attention from you, the readers of this newsletter.

In no particular order, here are 5 first principles for pricing of software services.

1. All prices are relative

All numbers in our lives are relative. Their values are not absolute. 

Their value is understood and processed by our brains only in relation to something else. 

100 EUR is not 100 EUR.

100 EUR can have almost infinitely different relative values, depending on the context, what we are looking to obtain, what we are comparing it to and hundreds of other variables that might or might not be relevant to a particular project.

This is why pricing is so difficult. 

We have to manage all this complexity in our heads.

Not only our own heads, but we also have to adjust for how all the other people involved (colleagues, clients, partners, distributors) think about numbers and their relative value.

EG4: All prices are relative and that is a good thing

2. You cannot ignore Willingness to Pay (WTP)

When you are talking to a customer about a new project, their thinking and decision making will be heavily influenced by:

  • Their expectations of how much it should cost
  • Their capacity to afford a certain budget
  • The value of that project for their business and its probability of increasing revenues or reducing costs
  • The relative difference that a specific supplier could make in terms of value delivered, which can impact the customer’s calculations
  • Their personal psychological profile and history of accumulated experiences. Some people see themselves as cost-conscious and they have a strong conviction of “never paying more than it’s worth” (whatever that means). Others believe that it always makes sense to buy the highest quality they can afford (again, whatever that means).

The sum of all these is their Willingness to Pay.

EG7: Willingness to Pay and How to Measure it

3. Total Cost of Ownership (TCO) matters

When a customer is deciding who to work with, they are not looking only at the price offer they receive. They are also considering all the other costs associated with that offer. 

Different suppliers will not only offer different prices, but they will also have different risks, extra costs or timeline considerations associated with them.

So if you want to have a competitive offer and maximize your chances of winning the project, you have to take into account not only the services you provide and the price you charge for them, but the entire cost picture that the customer has to deal with.

EG1: Customers always pay more than the contracted amount

4. Emotions can derail us …

… and lead to sub-optimal pricing or sales outcomes.

EG25: We don’t have emotions. Emotions have us

5. Competition doesn’t matter, if you understand your customer

The better you understand your customer, the shorter the list of direct competitors becomes, as each potential supplier will have a different combination of attributes and levels that describes their offering. 

The customer is only one, so the combination of attributes of what they need and what they are looking for can be described in a narrow interval of quality levels.

And that’s the opportunity: the closer you are with your offering to that narrow interval, the higher the chances of you getting the contract, regardless of who else is competing with you.

EG12: How do you compare to the competition

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