Tangible Costs, Time, and Pricing to Value

Written by Sean Murphy. Posted in 2 Open for Business Stage

Amazon’s S3 and AWS platforms, and similar on demand storage and computing services, are becoming increasing popular as core infrastructure for software startups. There is a tendency, because the costs are well defined, to base pricing on “margining up” these services. There are three problems with that:

  1. Does Not Price to Value: you normally want to price to value and use your costs a test for how inviting your pricing will be to the competition.
  2. Ignores Opportunity Cost of Your Time:  in an early stage startup most of your real costs are the opportunity cost of your time and the need to move down the learning curve on a number of key processes (principally sales and new customer bring up).
  3. Immediately Positions You As a Commodity: pricing by margining up commodity services immediately positions you as a commodity and may prematurely shut off your search for creating more value for your customers. Reframe “I cannot charge that much” to “what could I do to create enough value for my customers that they would pay that much.”

The remedies:

  1. Price to Value:  If you are going to launch a new SaaS product based on Amazon or a similar hosting service I would try and determine what your customers value about your service that is otherwise difficult to obtain or unique (differentiated):
      • What are they doing now to solve the problem? How much is it costing them in time and money?
      • How much risk is there in alternatives? Can you substantially lower the risk (or the variance in outcome)?
      1. Calculate The People Time Needed for Key Tasks:  you need to build a full model of the service that includes the time needed and costs for:
        • executing all the relevant activities needed to make prospects aware of your offering,
        • supporting prospects evaluating your offering,
        • bringing them onboard as customers
        • supporting them as customers,
        • retaining them,
        • turning them into a reference.
      2. Focus on a Niche Where You Offer Premium Value: instead of thinking about charging a lot of people a little, think about who would pay dearly for your service. Focus on them. Targeting a smaller group normally lowers your marketing expense and allows you to laser your message (examples, key benefits, terminology,…) on their situation and benefits.

      Two good books on this issue:

      • Free, Perfect, and Now” by Rob Rodin  which details some of the challenges of competing against others with access to the same basic technologies (somewhat similar to the challenges of margining S3 & AWS:  anyone with a credit card can take a look at your website and decide to leverage Amazon for a similar business.
      • The Strategy and Tactics of Pricing” by Thomas Nagle is the test book that I have read on pricing issues.

      Trackback from your site.

      Comments (1)

      Leave a comment

      Quick Links

      Bootstrappers Breakfast Link Find related content Startup Stages Clients In the News