We all know that one of the main objections that prospects have in sales situations is the price of your product. Every potential buyer is going to either question the price, ask for cost consideration or is going to use the price as an excuse for not buying your product. So, many companies resort to discounting or even altering their pricing philosophy and levels based on these common prospective customer objections. But the question is: “Is your price too high or have you not properly positioned it and defended it?”
And, there are many pricing strategies that companies employ. So, the next question is: “Are we using the right pricing model?” There is no right or wrong answer to this in general. We will explore some pricing alternatives below.
But the fundamental issue is that many entrepreneurs, due mostly to lack of sales experience, do not know how to set a price nor propose a price to a prospective buyer. They might say “Our price is $xx.” Period. This is dangerous.
First off, if you are doing a proper Discovery Call, your buyer should also have a general idea of your ideal customer profile and what the price ranges are for these customers and how you arrived at them. Sometimes entrepreneurs choose not to discuss price until after the prospective buyer has seen the product (hoping that the buyer will see the value through the demo…eh, maybe). But telling your prospective buyer what your ideal customer is and what, on average, they have paid is a good place to start.
But, whenever you decide to present the price of your solution you must ALWAYs begin with the value proposition. This is often less about the pricing model and less about the relative price and more about proving value. You need to remind them of both their reasons for wanting to consider you (their problems and the implications of those problems) as well as your differentiation and the benefits and outcomes that you will provide. Then you also need to remind them of what the price includes. For instance, for a SaaS company, this might be:
- The annual license
- Hosting fees
- Bug fixes
- All software upgrades
- Telephone hotline support
- Access to the monthly customer newsletter
- Other materials that you may offer like training videos or promotional materials
- Whatever you have and the more the better
Then, and only then, should you provide the price. The buyer needs to understand the value and also all the things you are going to do for them. After presenting the price it is essential that you immediately ask “Is this what you were expecting and is this price justifiable based on your needs and problems?” Plus, you should determine what the approval process for your solution would be. Who makes the decision? Where would the money come from? Things like this.
The same holds true with services or implementation, it is critical to first itemize all the things that you will do if you are charging implementation fees, like:
- Data loading and checking
- User training
- Set up of any meta-data
- Promotional efforts
Pricing strategies include:
- Fixed fee subscription
- Subscription based on organization size
- User-based pricing
- Pricing based on Daily Average Users or Monthly Average Users
- Transaction-based pricing
- Product module-based pricing
- Cost-based pricing
- Value-based pricing
- Hybrid approach
- And, of course, my least favorite Freemium
Many of the above can be implemented on a sliding-scale discount method where the more you buy, the lower the unit cost is.
Let’s explore one example of the Hybrid Approach. Often companies want to price based on an annual subscription. This helps with company valuation and investors then think recurring revenue. But, the buyer balks at the subscription price and may want a usage-based model. This creates several obstacles. First, you don’t get (often desperately needed) cash up-front. Second, you don’t know how to book the sale on a contract basis since you don’t know what the total amount is going to be until you get some history. Next, this creates monthly billing which you may not be set up to do consistently. And finally, and maybe most importantly, it occurs to the buyer that they may not want to promote your product because the usage will be very high and then they will be paying more than the originally proposed subscription fee. So, you end up with low usage. The way around this is to offer usage pricing with a minimum upfront commitment that is meaningful to you and acceptable to the buyer. Then, the usage fee can kick in after the minimums are used up. But then you can cap the total amount so that the buyer is incentivized to blow through the usage to get above the cap (all the rest are then free for the term of the license). This hybrid approach can be extremely effective and, while still not a fixed fee subscription (which is what you want) is a win-win for you and the buyer.
Another issue to consider is paid-pilots. Many buyers want to prove that the product will work and that their users will use it. Unless you are really early-stage and looking for reference customers, never offer your product for free. First, you have set the value of your product (zero). Second, the buyer has no skin in the game to actually make sure that the pilot is fully tested. So, you can recommend a paid-for pilot which can be simply your annual license times the number of months of the pilot. Or, you can arrive at another way of pricing the pilot. Just don’t do free. (Note: Make sure the success criteria for the paid-for pilot is established and is quantifiable. In other words, if you succeed in accomplishing the goal of the pilot, the buyer agrees to move forward). Another consideration to motivate the buyer is to credit back the pilot fee towards an annual license if the buyer agrees to move forward. Please read the eBook on the Dreaded Pilots at:http://arbordakota.com/product-category/sales/
Another way to handle pricing is to offer an extended period of the license for an annual amount. This may occur when the buyer says that they need to wait until the next annual budget cycle and need to put this into that year’s budget. You can then suggest an 18-month license (example) for the price of the annual license and that you won’t bill the customer until after the new year begins. This can be very effective at eliminating the “Let’s wait until next year and then this no longer is a priority at that point” issue.
Many entrepreneurs simply do not know how to creatively and properly present and defend their price. A price tag hanging out there without the meat behind it is begging to be challenged…. every time. It isn’t hard… It just takes common sense and discipline. You may still get objections on price, but at that point you can begin by re-exploring their problems and asking what things they might want you to not include in the price in order to get it to where they expected it to be. Most buyers can’t find places to cut. Then, they may submit to the price if their pain is great enough.