Reflection and Thoughts on Pricing
I have been thinking about pricing a lot lately. Pricing is one of the 5 Ps of Marketing. Product, placement, pricing, people, promotion. It is an essential part of entrepreneurship and product development. Yet, it has to do with money, and this may be a psychological blocker for many of us. Pricing might be a "psychological problem", not a money problem (as Remit Sathi may put it). Pricing is also a tough variable to define. If pricing is based on value, how do you define the worth of your product/service in the first place? An approach to pricing may be to look at the competition. While this can be a great way of gauging the market and getting an estimate of the best pricing range, this is not the case in blue ocean strategies. When you are the first, you set the standard for pricing (in the present and future). How do you make that decision? What variables do you take into account? How conservative do you intend to be with the decision?
I primarily "battle" with "the pricing dilemma" in my Notion consulting work. Pricing your work is essential to establishing clear expectations and value for the clients. Yet, the value of work appears rather blurred and undefined to the inexperienced eye. What if this price is too much? What if I am leaving money on the table? All questions the inexperienced mind may ask itself, trying to figure out the way. Imposter syndrome is also at play here, to some degree. Especially when the price is set too low, such a decision may have to do with a feeling of inadequacy and unpreparedness. No one feels—nor is—fully prepared, I would argue. Pricing is the art of understanding and quantifying the value of an offering for the life of the final user.
In consulting, pricing may be related to the return on the investment, say, for a streamlined project management workflow. It may be the difference between having a clear company purpose and not having it. While these variables are difficult to quantify, there may be a way. By calculating return on investment, you may deduct the value of your offering. As Chris Do from The Futur points out, value-based pricing is the best approach to pricing "design work" (and any type of project).
Value generation is most clear in sales, I would assert. If you are a sales agent, and you manage to onboard a new client for your CRM software, you can tangibly quantify the return for that client for any given time frame. That is why sales agents are almost always remunerated through a percentage of each sale. You can figure out the value they bring to the company.
Traditional pricing approaches rely on two main variables:
- Costs → especially when you offer a product, you may base your pricing on the costs incurred throughout the production process, plus a markup. This is very straightforward, and the markup can be high or low also based on your brand reputation. Let's consider Apple, for example. They have the leverage to use a high markup on their products (hence increasing their margins) due to the high-quality-perceived brand.
- Competition → you may also use your competition as a benchmark to set prices. By mapping your competition, you may be able to understand the expectations of consumers in your market. This is a great way of adding clarity to the pricing equation, especially if you are at the early stage. But what if you are in a novel market? What if you are a first mover? Then, there is little to no competition, and you are the one setting the standard for pricing.
So, when you are the first mover, you have an advantage (the first-mover advantage). But you also get to deal with the challenges that being the first brings with it. Pricing is one of those challenges. You may deduct pricing from similar markets and offerings to get a first estimation of the playground. If you specialize in Bitcoin and new financial assets consulting, you may look at the traditional financial consulting sector, and gauge a pricing ballpark from there. Then, you can set your own price based on scarcity, your ability, and strategic positioning.
Your strategic position is a key variable of pricing, I would argue. Strategic positioning refers to the way you intend to place yourself in the market: do you employ a differentiation or cost leadership strategy? This is a matter of first principle thinking. Defining your strategy starts from the first principle. You need to ask yourself where you intend to play. And then make decisions accordingly. If you are a cost leader, you prioritize quantity over quality, hence striving to offer your products/services at a low price. In contrast, when you choose a differentiation strategy, you commit to providing outstanding quality, at a premium price.
When you are a first mover, you set the standard. And you better pay attention to the patterns and behaviors you establish in the industry. One principle is often universally valid: price battles lead to extinction. Playing the game of constantly lowering prices to increase market share is a recipe for disaster. Pick your identity, and embrace it fully and unapologetically. Pricing is also an iterative game. You can adjust it as you figure out the value created over time. The market will reward you if you truly generate value consistently over time.