Pricing takes empathy

I got a reminder last night about how self-centered pricing can be. I know that I have fallen victim to being a bad pricer, sinking into the lazy cost-plus model. But that is not the best way to price for you, or for the buyer*.

Pricing takes understanding and empathy. To set the right price for the right customer, you must understand what problem the customer is trying to solve. Why does this problem exist, and how does this problem cost the customer? You must know your customer and market – you must think about it from their perspective.

If I have a problem that is costing me $100, and someone has a solution that costs me $90 (including my own switching costs and opportunity costs), then I would be foolish to not take it. If I trust the solution provider based on all of the signals that I might use to establish credibility, like market authority, brand promise, reference checks, or an inspection of their solution, then I would gladly pay the solution provider for that product or service.

As the buyer, it doesn’t really matter if it costs the solution provider $5 to deliver, or $95 to deliver. I am still saving $10. That is the Value in this transaction.

That price, $90, is a Fair Price if both the buyer wins, and the seller wins. A win-win! The seller wins if it makes a Profit (price is higher than cost). The Buyer wins if it gets Value from the purchase (price is lower than buyers costs without the product or service).

Price, value, and profit diagram

We live in a complex world, where an infinite number of factors impinge upon the “true” cost of a buyer’s problem, and the “true” cost of the seller’s solution. For example, a lot of value in the product or service is in the buyer knowing that the solution provider will be there over time. I am not going to by insurance from someone that has told me they are going out of business next week. The value of that, and so many other factors, is hard to measure. (And, this is where Brand plays such an important role in establishing Fair Price!)

But if you can put yourself in the customer’s shoes, understand why it is going to market for a solution in the first place, and work with that customer to address their needs, then you can get to the right price.

Simple Steps:

  1. Ask your prospective customer/market what problem they are trying to solve.
  2. Ask “Why?” a couple of times. Get to understand what that problem is costing them in terms of real money, time, lost opportunity, lost growth, focus, and maybe even happiness.
  3. Understand your own costs – and all of the costs (like opportunity costs).
  4. Aim to meet in the middle, create a Fair Price that is a win for the customer, and a win for you.

* That is, unless your brand promise is based on some order of scale and volume, like Amazon or Walmart. But even then, I would argue that retailers like Amazon and Walmart set price based on market value, not on the cost of the product they are selling.

Originally published on February 8, 2018 as Pricing takes empathy on LinkedIn.