What You Don’t Know About Pricing Can Hurt You

Posted by Madeline Reddington /December 16, 2015 / Cofounder Advice, Entrepreneurial Advice, FounderTalk, Hardware, How To, pricing

Untitled design (20)Finding the perfect price point for your product can be scary and daunting. According to Price Intelligently co-founder Patrick Campbell, the key is to think about it as an ongoing evaluation, rather than framing the whole thing as a one-time vendetta to chase down a single perfect number. We talked with Campbell this week about the importance of customer personas, surge pricing and leaving money on the table.

How did you discover your love for pricing and why do you love it?

I think anyone who says they started by “falling in love with pricing” is giving you a fake origin story. It’s something I’ve definitely fallen in love with, but initially it was like a lot of other stories—born out of a problem. My background is in econometrics and math, and I was working on value modeling for the US intelligence community, then Google – very very big tech. When I got into startups and smaller companies, I started realizing just how painfully bad we were at monetizing.

What are the biggest pricing mistakes you consistently see companies making?

There are two big mistakes we see all of the time:

1. Not pricing on value. I understand that’s kind of an amorphous statement, because what is value?

But more often than not, what we see in the software space, is people pricing based on costs or competitors rather than customers.   Tweet this!

At the end of the day, quite literally, the only people who can give you the information you need about your price are your actual customers.

2. Not having “quantified buyer personas.” A lot of people have pretty avatars or cute names for their customers or users, but they don’t have actual quantified data on how these people think, what they value, etc. Mainly because they don’t really talk to their customers—and potential customers—as much as they should. In reality, you should know more about your customer than anyone else out there.

How do you figure out how much your customers are willing to pay, without asking “how much are you willing to pay?”

What’s funny about it is that’s exactly what you’re supposed to do—ask them how much they’re willing to pay. But you do it in the right manner. Human beings don’t think about it as a single point; we think about value as a spectrum. So if you go up to someone and say ‘I have this new app/service/product, how much are you willing to pay for it?’ It’s very difficult for them to come up with a number. Instead, if you asked them, ‘At what point is this product way too expensive and you’d never consider purchasing it?’ That’s a much easier answer to come up with. Then you can follow up with ‘At what point is it too cheap and you question the quality?’

That gives you at least a range of where you should be. There are other questions you can ask as well, but the long and short of it is it’s not about not asking your customer about pricing points; it’s about asking in the right manner. Our software hinges on getting data from customers, which we mainly source through surveys, and we’ve sent about 15 million of these things at this point—not a single person has responded negatively to us asking about price. People are more than willing to give this information because we all realize that things cost money.

Is there a difference between charging for hardware and software products? Is it harder to iterate on price in hardware/hard goods?

The way that you figure out pricing should not change. You should ask those questions, and others around packaging, feature differentiation and things like that. But the reason pricing process shouldn’t change between hardware and software products is because at the end of the day, in both cases your customers don’t care about what your costs are. What that means for you as an operator/entrepreneur is that if you find out people aren’t willing to pay more than the cost of your product, you have a couple of options: a) you’re building the wrong product b) targeting the wrong customer persona or c) all of the above. This is another reason why it’s so important to quantify those buyer personas. We see people building the wrong products all the time. Or, even worse, putting a lot of time into something that they think has a worth that, in reality, people aren’t willing to pay for because it’s not solving as big of a problem as they thought.

Do you think about B2B and B2C pricing differently?Untitled design (21)

Again, the practice of figuring out price isn’t that different, but the actual implementation is typically different. There are typically some things you can do with B2B pricing that you can’t do with B2C. It comes down to the complexity that you can put into your pricing model. If you look at a lot of B2C pricing, on the software or hardware side, things are fairly straightforward. You might need one, maybe two, tiers without a lot of differentiation between those tiers or offerings. With B2B, you can get pretty complicated because with non-consumerized B2B—meaning B2B where it involves a salesperson or more of an enterprise-type sale—that salesperson or support person can close the gap in that complexity pretty easily because it’s not necessarily something you’re trying to sell touchlessly.

The biggest problem that we see in B2C pricing is that people confuse complexity or simplicity with ‘oh, I need a single price point.’   Tweet this!

Don’t confuse having one price point with simplicity. If you only have one price, you’re assuming that no one is willing to pay more or less than that particular price. In reality, buyers are all very different. You’re likely leaving money on the table if you’re only working with one particular price point.

There was recently a big to do in the press when Martin Shkreli raised the price of the drug Daraprim was unapologetic. What do you think of his explanation and handling?

Interestingly, it’s very similar to situations that Uber has found themselves in when it comes to their surge pricing. No one really complains until there’s an “act of the universe” like a major snowstorm that changes the pricing drastically and then it’s a PR crisis. Surge pricing happens every day in different cities. You don’t see scathing blog posts or tweets about paying triple fare because there’s a light drizzle and you need to go across town during rush hour. No one complains then. It’s when it’s a ridiculous time.

Similarly, there are plenty of pharma companies that raise prices very rapidly, in a similar fashion. But what they failed at is preventing it from becoming a PR crisis.

As soon as your pricing becomes a PR crisis, you’re kind of screwed.   Tweet this!

Then Shkreli is coming out saying “Oh, we should’ve raised the prices even more” and making less-than-mature comments on Reddit and things like that. We don’t do pharma pricing, so I don’t know enough to make a judgment on whether the price increase was justified, but I do know that it wasn’t handled properly. More than likely, just judging by the characters involved, the price was not necessarily as researched as it should’ve been. There’s also other externalities with drug pricing  - because sometimes that’s the only drug available- but in this case it just was not handled with any class or poise.

If you could tell entrepreneurs 3 rules to follow as they decide how to price, what would they be?

1. Price on your personas and make sure you research those personas.

2. Keep in mind that pricing is a process. You need to re-evaluate every 3-6 months.   Tweet this!

You don’t necessarily have to make changes every 3-6 months, but you certainly should be re-evaluating your prices that often.

3. Pricing will never be perfect, and that’s kind of the point. You should iterate your price and not feel like it has to be this giant project every 5 years. It should be something that you’re testing similar to any growth test or product/customer development. A lot of people are paralyzed by their pricing and think it’s this ivory tower thing that they have to solve or can’t change—in reality, you should also be testing it similarly to landing pages or other optimizations that you’re doing.