Welcome to Biz Book Fridays! I’ve got a whopper of a biz book habit and I’ll read ‘em so you don’t have to. I bring the juiciest morsels straight to you.
Today I’m talkin’ two pricing lessons from the very excellent (if dry) Pricing with Confidence.
Underneath that lame-o, goatse-scented cover beats the heart of a biz book tiger.
First, your customers don’t care about your costs. They care only about the value you deliver.
Let’s say your cost is a cake. The amount you charge above the cost of that cake is the icing on the cake. Result: a cake with a thin layer of tasty icing! Deliciousness.
Too bad this (tasty) model is totally wrong.
Believe it or not, this cake-and-icing model is a real thing, called cost-plus pricing. Only there is no cake. Cost-plus pricing is one of many majestic pricing unicorns: it is easy, appealing, convenient, and in complete denial of reality.
Fact: Your customers do not care about your costs.
A customer will never think to themselves, “Gee. The price is $10, and I’ll only get $8 of value out of it… but it must have been really expensive to make! That poor little company. I’ll throw ‘em a bone.”
Never. Not once. Not ever.
Not unless they’re your mama.
What’s the alternative?
Value is the basis of business exchange. You provide products and services to customers so they can build their own value. In exchange, they take a part of that value you helped them build and return it to you in the form of price. That’s the way business is supposed to work.
You have to look at how much value your product creates for your customer, and price from there.
Let’s say you create a little screencast course that saves would-be Ruby devs hours of ineffective Googling. How much can they charge for the hours you saved them? That’s one way to look at value.
Or what about if you create a tool that helps freelancers close more leads? How many more leads will it help them close, and how much income will they get from each lead? That’s the value.
Work backwards from the value to the price. Create value – then capture it. Mwahaha.
The Bottom Line
Change the way you think about price. Don’t think about your costs: think about customer value.
Then price your product accordingly.