Frankenstein's Monster: A Lesson in Pricing
Friday, July 17, 2015
Imagine the following scene:
- A team at a software startup is looking at its creation. It's works. It's a thing of beauty, but it doesn't yet have a price.
- "What should we charge?" asks one engineer.
- "I don't know!" cries another.
- Everyone looks around the room, desperate for an answer. Then the boss has an idea, "Let's just copy the pricing of our most successful competitor."
- Everyone breathes a sigh of relief. Surely their biggest rival studied the matter from all sorts of angles. As a Fortune 500 firm, its staff must have picked the right price. They quickly emulate the market leader and begin an advertising blitz. Six months later, the firm has gone bankrupt, and no one can figure out why.
I'd be willing to bet that story plays out more often than you might think. It's always tempting to think that big companies have all the answers, but the truth is that they don't. As I suggested in Why Do Large Firms Hire Poorly? Pricing!, big companies don't always hire the best people.
Even if a rival firm's pricing is optimal for it, is there any reason to believe that its prices are right for you? Probably not.
Many companies have very different strategic goals. Some are looking to solve liquidity issues - here is but one firm that made a Faustian bargain for a one-time revenue increase. Others are looking to prevent newcomers from entering a market. Others have cash to burn and are willing to trade profitability for an improved reputation.
Unless you have the exact same needs, financials, product, outlook and goals as another firm, it makes no sense to simply copy its pricing. You might wind up with price points and offerings that are not terrible. More than likely, you'll find yourself with prices that lead to results that are not only suboptimal, but work against your business goals.
It's worth putting in the effort to perform a bit of business introspection and create your own pricing model. Not sure how to do that? Well, we can always help. Contact me for a pricing consultation, or read my book on software pricing.