Tangible Costs, Time, and Pricing to Value

Written by Sean Murphy. Posted in 2 Open for Business Stage, Rules of Thumb

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 your price on adding a margin to these services. There are three problems with that.

Three Problems with Cost-Based Pricing

  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.”

Price to ValueThree Remedies

Three remedies are to price to value, fully account for your time not just raw inputs, and to focus on a niche.

  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)?
  2. 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.
  3. 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 Pricing

  • 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 best book that I have read on pricing issues.

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Photo Credit: doomu / 123RF Stock Photo

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