Pricing and the Build vs Buy Decision
Welcome to the November edition of the Pricing & Monetization Newsletter!
November can be an especially confusing time for business owners - and not just because shoppers are expecting Black Friday sales. November is just plain weird.
- The word November comes from the Latin word novem, (meaning nine), but the month is actually the eleventh month of the year.
- November is the month in which The October Revolution took place.
- November is host to World Prematurity Day, but not once has it ever been celebrated early.
Be careful out there, and be sure to price with caution!
Pricing Question from a Reader
I'm starting a service business and am trying to figure out my pricing. As long as I'm charging less than it would cost for buyers to perform the work themselves, my offering will be an instant buy, right?
According to traditional economics textbooks, you're clearly on the right track.
Your experience in the real world, however, might differ.
Being a Perfect Substitute Can Be Dangerous
I think we need to address one of your underlying assumptions.
Very rarely are what you are selling and what customers are able to do for themselves a one-for-one match. In most cases, there will be differences in quality, scope, immediacy, and a variety of other factors. As a result, focusing only on the difference in pricing might be a sub-optimal approach to pitching your services.
If, on the other hand, your offering is an exact match to what a potential customer could perform for himself, you likely have bigger problems. The reason for this is that you're probably selling a commodity. The future for small vendors of commoditized products is usually not very profitable, and, over the long term, is fraught with the risk that someone else could come along later and undercut you.
It's been a while since I've mentioned my DUMB model, but knowing how your offering scores against it will be of great importance to your analysis.
- Discoverability - Just because you're cheap, it doesn't mean that potential buyers will know that you even exist.
- Urgency - Just because you can solve a problem, it doesn't mean that your ideal customer actually has a strong desire to see the problem solved.
- Mesmerization - Just because you can solve a problem, it doesn't mean that your potential buyer will believe that you can do so.
- Barriers to the sale - Just because you charge less than a firm's internal cost to solve a problem, it doesn't mean that the buyer wouldn't have to incur additional costs to hire you. Additionally, there may be strategic reasons that buyers would choose to keep processes entirely in-house - even when your offering is far less expensive.
Cheaper Isn't Always Necessary
When you focus on making your products cheaper, you often lose sight of one important fact: cheaper isn't the only approach to instant buy. Sometimes you can charge far more than it would cost for a customer to perform the work himself - and make a fortune in the process.
Many people are perfectly capable of painting their own houses, mowing their own lawns, and unclogging their own toilets. Nevertheless, legions of these able individuals pay a premium to outsource such labors. The buyers would rather not get their hands dirty or spend their time and attention on such unpleasant tasks. Others may simply lack the confidence required to perform the job.
Sometimes buyers pay little attention to a vendor's pricing at all. Those who are busy will often be forced to focus on opportunity costs instead. If a firm needs to tackle two important tasks, but only has the internal resources to complete one of them, its managers may be willing to pay a tidy sum for a third-party to complete the other job.
Telling potential buyers that it's cheaper to outsource your tasks to us is barely a step removed from competing on price. It's almost always more profitable to compete on superiority of outcome rather than on low a price.
As any salesman will tell you, a focus away from low, low prices allows providers to charge premium prices for their offerings.
Questions come from readers like you. If you'd like your questions answered, send them my way.
♫This Q&A and many others are now available on the Pricing After Dark podcast.
Pricing in the News
- There Are More Ways to Trade Stocks for Free. But There's a Catch.
- Licensed Marijuana Businesses Struggle to Stay Solvent as Black-Market Producers Drain Cash From Market
- Cable companies use hidden fees to raise prices 24% a month
- Melbourne property buyers and sellers left in the dark as sale prices kept private
- The Housing Crisis Part III: Fullerton
- It's only $4.99. But Costco's rotisserie chicken comes at a huge price
- California rent control law may exacerbate housing crisis, experts warn
- 51% of California funeral homes hide prices or make them hard to find online, consumer groups say
- Stop penalizing loyal customers, UK regulator tells car and home insurers
- These LA Cafes Let Customers Pay What They Want... Only Not Really
- Walmart will subsidize vendors, in first shots of holiday price war with Amazon
- Supreme Court of Canada Decision Provides Important Access to Justice for Victims of Price-Fixing
- HP scores $176m win in CD-ROM drive price-fix case -- after one biz emailed rival with 'Price Fixing' as the subject
- California's Prop 47 leads to rise in shoplifting, thefts, criminal activity across state
From the Blog Archives
- Happy Buy Nothing Day! - Finally, a holiday more ridiculous than Festivus...
Notable Pricing Quote
"Money often costs too much." -- Ralph Waldo Emerson
Shameless Commercial Plug
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