Setting Intelligent Prices that Create Future Growth

There are lots of ways to grow a business, but really only two categories. “Organic” growth typically involves growing the business from the “inside out.” This generally means achieving growth through increased sales. Larger companies sometimes strive for additional market share though “inorganic” growth. Inorganic growth typically involves growing from the “outside in.” Often that means growth through acquisitions and/or other corporate transactions. If you own a smaller business, organic growth is often the only option available for you. One of the best ways to allow your present day sales to support your future growth is through a good intelligent pricing model.

A good pricing strategy can mean the difference between selling a product or service or not, obviously. Without getting too preachy, if you over-price your services you may have a few high margin projects, but over time even the most free-wheeling company will eventually want to cut costs. Under-pricing carries additional risk, not the least of which being that if you are overly inexpensive then your clients will find ways to abuse the relationship and you might find it difficult to make a living and grow your business as all of your time will be spent servicing a smaller number of clients. With the understanding that under special circumstances you may need to under-price or overprice (more on these in later postings), striking a balanced pricing model with the future in mind can make all the difference.

So what is a balanced pricing model? A balanced pricing model is one that provides your product or service to your customers today at a price that delivers enough value to justify the price paid. This is very subjective, but in the end what it means is that nobody feels that they are being ripped off. With that said, there are two ways to achieve organic growth through pricing. The first is through new sales to new clients and the second is through additional revenues earned from your existing client base. This is where intelligent pricing comes in.

Assuming that you have made a sale and nobody is upset, then you can assume that your client is generally happy or at least satisfied with the value being provided. As a matter of principal, I try to set prices that ensure that the purchasing party is receiving a greater value than what they are paying for. As a general rule, this makes for a pretty healthy client relationship while simultaneously making it difficult to be unseated by competitors. This is a slight under-pricing of services to be sure, but not so much as to make me feel that I am getting used. This allows me to offer additional services or features in a sort of a la carte manner to achieve additional growth.

There are a number of pricing models for subscription-based products or ongoing services that typify the varying pricing strategies employed by many firms. They are:

Zero Dollars for the First Seat with Limited Functionality – In the end, there is no free lunch. This is a very common way to build a customer base. Essentially, you are giving your product away with the hope that the people using the product or service will love it and will either pay for it once you start charging for the service or will buy additional services later. Sometimes, this involves offering “basic” services that in reality only satisfies a very small percentage of the market but give a taste of the full blown product or service. In all cases, clients eventually feel they are being “baited.” The reality is that they are correct. This is never a good way to build a long lasting client relationship. Although for many firms seeking outside funding this is a good (if not temporary) way of building a subscriber-base for investors.

Full Service with Relatively High Prices – Commonly referred to as “all-you-can-eat,” this is the common approach of companies seeking to serve the high end of the market. In the end, they intentionally leave money on the table from smaller firms in order to avoid the cost of servicing them, thereby freeing up staff to focus exclusively on larger clients providing better margins to the company. This strategy seems to work best in growing economies as the larger firms tend to spend more to get ahead. The problem is that in a slower economy or a down economy these firms also tend to cut costs more drastically and it usually takes a while for them to bounce back. This leaves the provider scrambling to replace lost revenues in order to survive.

Low Introductory Prices with Per Feature or Low Per Seat Pricing – If done correctly, this is by far the fairest pricing model. Basically, you allow clients to pay a reasonable fee to realize all the benefits of your product or service. It is important to make sure that they receive all of the benefits that they are promised, even the implied benefits. If they are happy with the offering, you can add additional modules or services that are complimentary at a later date to increase revenues organically. By limiting features or services, you are essentially baiting them. This is to be avoided at all cost. Otherwise your future growth will have to come from adding clients, and some percentage of that will actually be replacing revenue leakage through lost clients. In the end, you might seem like you have higher margins but in reality your cost of sales is much higher. You’ve just hidden your costs and added pressure to your sales team unnecessarily.

In the latter model, the client benefits from the relationship. You benefit as well, but you leave the door open for future growth by maintaining a good relationship and having a thorough understanding of your market. Basically, you are giving up some current revenues in order to ensure future growth.

If, for example, you price a product a $100.00 per seat, your clients will expect superior functionality and service. More importantly, they will be resistant to additional fees for added features or any price increases at all. Chances are, you will sell more one and two seat accounts than anything else. A price of say, $25.00 per seat and $2.50 per additional seat, will allow you to sell more product to more companies. If you can get a percentage of these clients to accept new features or add even one seat, you will exponentially increase revenues with the same client base. These firms will more likely add more seats earlier due to the favorable pricing and will continue to add seats in the future. Once your product becomes ingrained in their operating culture, your revenue will stabilize and you can focus on adding clients.

This is simple math. I would rather have 100 clients paying $25 each than one client paying $2,500. The cost of servicing the 100 clients can be controlled with technology and smart operating procedures. When the 100 clients all add just one seat, you have organically grown your business by 10% with near zero cost of sales. As an added bonus, your business risk is lower because you have developing a larger more diversified client base. In order to achieve the same growth from a $2,500 account, at the very least you will have to wait a year to raise prices. Because that company will likely buy fewer seats, there is more business risk associated with that revenue stream as well and the loss of just one client will be felt more acutely.

In the end, your pricing model should be created while considering both risks and rewards. By offering a solid product at a great price (as opposed to a “fair price”) your clients will be more satisfied and more likely to spend more with you in the future. Yes, you might have to manage support costs more closely initially. But if your product is solid, chances are your long term growth will far outstrip the costs associated with achieving it. That is pricing nirvana.