Whom Can I Charge?

Thursday, August 13, 2015

Pricing is hard. The more you learn, the more you want to fiddle with your numbers. But isn't there more to pricing than knowing what to charge? Certainly! As it says on my homepage, price is more than just a number.

Case in point: I spoke to an entrepreneur whose goal is to reduce the incidence of violence in American schools. Unfortunately, she discovered that few institutions could afford her offerings. Most were struggling just to keep the lights on. As a result, she was planning to reduce her fees to absurdly low levels.

Never one to recommend competing on price, I asked her a simple question: Why are you thinking about charging schools at all? She looked at me as if I were insane. How would she be able to pay her bills if she didn't charge anyone money?

I then suggested that she contact insurance companies instead. While many schools undoubtedly self-insure, I suspect that others purchase insurance policies from external agencies. If schools were unable to pay her rates, maybe their insurers could.

Here's the outline of how my scheme might work:

  1. Dollarize the existing pain to insurance companies:
    1. Estimate the risk that schools will experience violence (the probability of an insurance claim).
    2. Estimate the dollar amount of the average school violence insurance claim.
    3. Multiply the two numbers together to figure out how much each school is expected to cost the insurer.
  2. Dollarize the value that the offering would provide:
    1. Estimate the reduction in violence that her offering could yield.
    2. Multiply this reduction by the average expected cost per school.
  3. Select a price below this estimated savings level.

Assuming that her estimates are credible, her offering could sell like hot cakes. Her pitch could be summed up in a single sentence: "I can reduce your expected payouts by $X for a fee less than $X."

A novel concept, right? Unfortunately, you can put the Nobel Prize nomination forms down. Similar strategies have been implemented already. When I was a younger lad, I received a discount on my driver's insurance if I signed up for a driving class. Each and every dollar I spent for the class came out of my insurance premiums. Everyone came out ahead. I became a better driver, the insurance company reduced its exposure to risk and the instructors were able to earn some money in the process.

When you're thinking about your pricing strategy, don't just focus on "what." Think about "who." Being able to identify the correct person to charge can make the difference between a big profit and a big nothing.

Do you need help with your product's pricing strategy? You'd better contact me for a private consultation. Oh, and grab a copy of my book to help you with your software pricing.