Price-setting – It’s All Relative

For many business-to-business companies, especially smaller ones, setting prices can be complex to the point of bafflement. Often the product or service you provide is genuinely hard to cost; professional services pose a huge challenge in this regard. How long will this consulting project really take us? I can estimate this much better than I could 10 years ago, but it’s still a very inexact science to know how much of our time will be consumed by a given set of tasks.

But even tangible, manufactured products can be tough to cost out in a B2B setting, particularly for SMBs, because runs aren’t as large as they would be in a consumer company, and economies of scale are harder to predict. It’s tempting to ask customers what they are willing to pay (“what kind of budget do you have for this?”) instead of setting a price, because of the lack of information we’re dealing with in the negotiation process.

We can learn something from innovative consumer products, though. This is a nifty blog post by Ash Maurya about price-setting in the tech industry, where he argues you should tell customers the price – you don’t ask them what they will pay. He uses a vintage Steve Jobs clip to illustrate how pricing is all about expectations - $499 (at the time) for an iPad looks paltry if you were expecting it to come in at a price point of $999, right? I’d argue that in many B2B environments, especially services, there is the same kind of fuzziness about expected prices as there is in the fast-changing world of consumer technology.

So, what can you anchor your prices to?

• Can you help your clients think about your prices in terms of other things that make the price seem relatively cheap? If you provide a straightforward discount to comparable services, that’s probably pretty easy. But you can also think about your price in comparison with other items your client buys, to put it in context. A price may seem high on a standalone basis, but if it’s compared to something that’s already in the budget, it starts to sound a lot more reasonable, especially with a client who doesn’t normally do a lot of costing or contract negotiation.

• Does your product take costs out of your client’s systems – so can you compare the cost of buying your product to the costs incurred as a result of not buying it? If, for instance, you have a piece of equipment that lowers maintenance costs in the whole system, can you quantify by how much?

• Is your solution more precise than competitors’ – so you can compare their sledgehammer price to your elegant surgical instrument price? Are they charging for things you think aren’t necessary? Are you solving one specific problem, allowing your client to spend only on what they need to?

• Can you compare your price to the costs of hiring someone in-house to provide the same services? When you calculate this, be sure to increase any salary by 30-50% to include benefits, vacation, facilities, equipment, etc. That figure can often be very surprising – and that’s before less tangible issues like the cost of hiring, and the opportunity cost of an empty seat if there is turnover, as well as training costs.

Hopefully these give you some ideas about how you can you make your prices seem to make eminent sense to your clients, in light of available alternatives and appropriate comparables. And part of it is, of course, taking the opportunity to define what the available alternatives and appropriate comparables might be.