I am sorry to inform you that most software services companies make a lot of pricing mistakes.
There is a list of more than 20 of these mistakes that I have documented over the years.
Not all of them are catastrophic.
Some are strategic, some are tactical and some are just silly.
Fixing them requires changes in mindset, adopting new methods and ways of doing things. It also needs building new internal tools or using tools built by other people.
Unfortunately, they will not fix themselves.
I picked 3 pricing mistakes that can be fixed in 15 minutes.
#1: (Mis)using discounts
Most companies use discounts:
- because the competition is doing it
- most people believe that offering a discount to a customer will make them take the deal, because they get something for free
- a lot of times, customers ask for discounts, so vendors feel obliged to give them, for fear of losing the project
- because it’s very easy to slap a -20% on the pricing proposal or the website
- critically, losses from discounting are not visible in financial reports
Why is it problematic?
Discount customers are often the wrong customers. At best they can provide some cash flow, but the hidden costs make them more trouble than they are worth.
You cannot build relationships with discount buyers.
And they will not bring you other customers.
They are not buying the quality of your work. They are buying your discount. As soon as someone else offers a lower price, they will be gone.
The fastest way to fix it: don’t give discounts and use price reductions instead.
Next time a customer or a sales team member asks for a discount, reduce the price AND change the quality, scope or other aspects of the project, so as to bring the value down, in line with the reduced price.
#2: Ignoring Economic Value
Most companies calculate their prices based on costs and the competition.
Imagine 3 potential customers that are all looking for a team to build a new software application.
You would be able to deliver any of the 3 projects with the same team of 5 people in your company. Effort and duration are identical. This means your costs are the same.
All 3 customers have access to the Internet, so their knowledge of the competition and other vendors is theoretically the same.
This means that you will give them the same price, right?
What if the 3 potential customers, who basically need the same team for a project, come from 3 different industries?
One is an NGO trying to build an app for children with little access to education.
The second is a Edu-tech startup, trying to build an MVP to raise an investment round.
The third is a large healthcare multinational company that wants to build an internal learning tool for its workforce.
Would you still give them the same price?
This is Economic Value and this is why you should not ignore it when you calculate your prices.
How to fix it: for every new potential customer, before giving them a price, quantify the value you create for them with your services, validate with them the economic value of what you are offering and use this in your price calculation.
#3: Relying too much on anecdotal evidence
It’s basic human nature to react to everything we hear, especially if it comes from people we work with every day.
So every time a colleague from the sales team says that the customer complained about the price, we believe even more that price is an issue with our customers and we have to reduce it.
If an existing customer makes a comment about the price, we extrapolate without even realising it to all other customers. We did this without thinking whether the customer is representative of the customer segments that we are targeting or evaluating if his context is in any way different from the others.
It’s very difficult to not be human. Some 200.000 years of genetic evolution are very difficult to erase in 15 minutes.
But there is a simple fix to this mistake: look for more data.
We cannot and should not reduce anecdotal evidence. So we have to counterbalance it with structured data.
Estimations of economic value for each target customer segment.
Data on the decision making process of potential customers.
Mystery shopping studies.
Objective measures of quality delivered and value created with your services.
Market research studies, such as MaxDiff or the Van Westendorp Price Sensitivity Meter.
Historical data on proposals made and success rates.
All these and many others are ways to use data to inform your price calculation process.
What can you do in 15 minutes to fix this: make a plan to gather more structured data.
WHAT THIS MEANS FOR YOU
Learning from our own mistakes is very effective.
When it hurts, it will stay with us forever and we are less likely to repeat the same mistake.
But it’s much more efficient, faster and less painful to learn from other peoples’ mistakes.