How Petty Cash Can Change Pricing Strategies

Thursday, November 13, 2014

Nearly every business has a petty cash drawer that contains a small amount of money to be used for low-value purchases. Have you ever wondered why?

In a way, it's strange that businesses have a two-tiered system for handling monetary transactions. For most purchases, items go up the chain of command. Bosses, analysts and auditors have to provide their signatures to demonstrate that a given purchase makes sense for the company.

This method is great for big purchases. No firm wants to find out that a junior associate spent a million dollars for a month long vacation in Tahiti. All of those signatures ensure that the right products are being purchased at reasonable prices for defensible reasons.

Unfortunately, this process is not without a downside. Each of those signatures slows down an order and adds additional expense - both in terms of time and money. These bureaucratic costs can easily outweigh the actual purchase price and then some. I remember trying to order a fifty dollar technical book at one of my jobs. Between filling out the paperwork and chasing down all of the requisite signers, I must have wasted a dozen hours and cost my firm hundreds of dollars in additional labor expenses.

There are two important facts you should know about petty cash.

• The obvious fact: Petty cash is a means of reducing transaction costs on small purchases.
• The less obvious fact: Some folks hate paperwork and will simply refuse to purchase software that cannot be bought with petty cash.

If you can price your products below the amount of cash kept on hand in petty cash, you will be able to sell them much more easily. The price you can charge will be heavily dependent upon your target customer profile, so a few questions to representatives from your target groups can give you a lot of information to use when pricing your products.

This is one case where charging less money may make a lot of sense - and a lot of dollars.

Do you want to know how to price your software product effectively? Take a look at the best software pricing book on the market, or contact me if you'd like to chat about pricing (especially with respect to software).