Here are a couple of rules of thumb you may find helpful in thinking about price, value, and your prospect’s perception of risk.
Price, Value, and Your Prospect’s Perception of Risk
- There is a difference between something that is free and something that costs one penny. The gap between charging nothing and charging one penny is much much larger than between charging one penny or two. See “The Penny Gap“
- If it’s easy to exit a business relationship then prospects are more willing to experiment. Lowering barriers to exit (not just price) makes them more willing to try your offering. See “Let Me Go Back!“
- If your costs are predictable and can be easily controlled by the customer then it’s easier to get a prospect to do business with you. Consider phone charges that are either a flat fee every month or per minute charges against only calls you place vs. getting billed for people calling you: you cannot predict how many people will call you. We have a client who insists on storage charges based on the “number of printed pages” in a document. Their prospects cannot predict how many “printed pages” will be stored and this is an ongoing point of contention.
- Even “free” has an opportunity cost. Carefully consider all of the direct and opportunity costs your product imposes before calling it free. The canonical example is the hypothetical free medical clinic at the top of Mount Everest: they can’t figure out why most of their patients are Sherpas. Many products offer user interfaces that are inadvertent IQ tests and are so hard to use that even though they are “free” few can figure them out.
- Businesses don’t like “free” for important functions because free does not come with an enforceable service level agreement or the promise of a real relationship with the vendor. See Ethan Stock’s “Google Responds Urchin Works” in particular this paragraph (bolding added):
We are asking our customers to bet their businesses on our ability to deliver. “Flaky but free” simply does not cut it any more. How many of you out there rely on Yahoo or Google email for business-critical communications? What if it went down tomorrow, for 48 hours? What if Salesforce.com stopped working for 48 hours? What if Ebay or Adwords stopped working? Marketing campaigns, communications, and commerce grind to a halt, and real damage is done to real people and real businesses.
- Always Probe for Costs and Risk of Status Quo: It’s also important to understand what are the costs and risk of the prospect’s current approach. In the same way that a “free trial” is not free, there is a cost to “doing nothing” or “living with the current situation.” Especially if they are confronted by trends or factors at work making their problem worse.
Focus first on how and why your customers find value in your offering with software or SaaS products your pricing will normally flow from that.
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