Matt Mayfield's Blog on Business

At the end of the day, the “correct” price is the price where both the buyer and seller agree to a transaction– Everything else is theory, guidelines, and positioning.

Pricing

How should a customer think about price?

1. Value.  This is the one they teach you in any marketing or sales class.  In truth, if your customer is pushing back on price, the most likely reason (and most easy fix) is to understand how the customer perceives the value and then question if that perception is correct.  When setting a value based price, make sure to “risk adjust it”.  ie. What will the realizable, real world benefit be?  If your product has an “insurance” nature to it (eg. super reliable brakes for cars), then it is important to consider both the consequences of bad brakes and the probability that this would happen with “normal” brakes.
2. Alternatives.  The alternative to an in-car navigation system for most people is a free phone app.  You can always talk yourself into why they should not be comparable, but ask yourself if your customer perceives this as a huge difference.  For almost every business activity where spreadsheets are used, there is a more optimized, dedicated software product; however, the evaluation, learning, and maintaining knowledge tasks are usually not worth it even if the price is low.  Thus great products are pushed out by inferior but known products.
3. Fairness.  This is usually the area that most people struggle with.  It breaks down into a few sub-areas
   1. Ideally, the buyer should see your product as a benefit in their life and your price as simply you sharing in that benefit.  Going back to Value (point 1), it would not seem fair if a supplier took 90% of the value and 0% of the risk.
   2. Your margins should be proportionate to your risks and investments.  They should not see all the ways you make “the easy money”.  Hence the reason most business people talk about absolute growth and almost never talk about absolute profitability.  (Be especially careful if you are selling/reselling a commodity as this will be used as a “greed index” by your customer for your entire offering.)
   3. Especially problematic for products where customers don’t know what the product should cost (eg. a software license with no cost of materials for an additional license) is pricing treatment.  It is one thing to overpay for something when everyone else made the same decision and also overpaid; however, it is deeply disturbing and far worse to discover that you paid more than others like you.  Because of this, offering discounts can many times backfire and make the customer less interested in buying.  If you charge different classes of customers different prices, make sure you could make an ethical business argument why that is ok. (Note, licenses or tiered pricing is always unfair and/or too complex to understand.)