No other business endeavor on the planet operates on "production time" when pricing products. Products are priced according to their value. Given a reasonably competitive market, that value will be accurate and fair for customers, and the customers will be able to find a similar product that does most or all of what they want at the price point that they can afford.
Setting price based on time savings limits the perceived value of your product since for most people they set the opportunity cost of their time pretty low. It might work better in a b2b sale where the opportunity cost is higher.
What you really want to do is provide value by letting customers do something that is otherwise impossible or painful.
For instance buffer lets you sleep while you tweet. That is much more valuable than saving time.
There is a guy on twitter (@pricing) that talks about pricing, go read a few hundred of his tweets and see it helps you get your mind wrapped around pricing better.
Agreed. Value, price, and cost are three independent variables. When they line up advantageously, you have a viable product. But one does not determine the others.
Assuming you are a software developer, I think you should reconsider your "price should approximate production cost" reasoning. I think it will hold you back if you eventually try something entrepreneurial.
When I started a small software company, I originally had a similar understanding. I subconsciously thought that the software should be priced to pay for its development cost, plus some profit. I was not very successful, until I realized that the product should be priced as a percentage of the value it delivered to the customer. Customers don't want you to do a lot of work, they just want their problem solved for a price that is reasonable relative to the benefit of the solution.
This idea reverses several of your conclusions:
1. The product should be priced based on how much value it delivers, and only those companies that can deliver the product for significantly less than that price will stay in business. Once a company finds a need that people will pay for, it generally makes sense to drive the cost of production down while maintaining the same benefit, thus maximizing profit.
2. The more value a company creates with the resources it uses (the greater its margin), the more left-over resources it will have to invest in producing still more benefits, or to return profits to its original investors.
So, going back to the cost of digital content, I am happy to pay for it, as long as I end up feeling the movie was worth watching for the price. And if they can produce great content without many resources (or with lower cost of delivery), all the better. My problem, right now, is that there is so much great content I cannot ever hope to watch it. But that is not a problem that really bothers me, I am happy to keep paying to have a long list of shows I'd like to watch, if I could just find the time.
Perfectly, that is the point I was kind of trying to make.
It is easier to ask for a random price, without taking the time to understand that there are a set of variables associated with production cost and keeping it sustainable.
No - there's ZERO logic in selling items as a function of the cost of creation or distribution. Pricing has everything to do with the VALUE it offers customers versus the cost that it takes to create it!!
- I believe in fair price. I've noticed the end users pay for the inefficiency of those companies not because the product is worth this value.
You could tell me, well it is the value as soon as someone pay for it? But do we have a choice? I just want to give that choice. I am even tempted to offer a pay for what you think it is worth.
If I am wrong in my idea, you'll see me raise the prices ;)
This is pretty bad advice. Price based off value delivered. If I was a sales person selling this product the first thing I’d want to do is calculate out the value of the time saved. “It pays for itself” is a wonderful proposition - why would I not buy such a product? Not only is it time saved, but it’s more efficient engineering cycles/sprints/etc.
If you know your market, you know your price. It’s very easy to A/B SaaS pricing. Does the proposed pricing sounds too high? To me, yes, but go out there and test it. Worse thing that can happen is nobody buys it.
However there's a case for fixed pricing and it can work to your advantage: Think of a difficult task or problem that you already solved in similar cases - maybe you already have the heavy foundation of that work ready as a template, maybe you automated complex, repeating steps. Or just think of a simple task that has huge value for your customer. Pricing shouldn't always depend on how long it takes you to finish a project.
Hey, that's a really cool idea! I hadn't thought of that.
The pricing is more or less an educated guess at what a company would be willing to pay based on the time saved, knowing that it can be changed as we get more information about use cases/value, etc.
It's fairly easy to price against perceived worth of labor, but it isn't really helpful neither in competitive, nor in emerging markets to base pricing decisions solely on it.
Concepts behind all pricing models are fairly simple and don't require overly sophisticated math. Instead, they require sober look into 4 variables:
- Replacement cost: what would it cost to replace your service/product with something else?
- Market price: what others are charing, charge around their price.
- Cashflow/Net present value: if something you're producing has long-term economic impact, you may price not only based on actual value of your offering, but on long-term profit your offering will generate. And, in some cases in enterprise industries, this is the only way to reasonably justify your prices.
- Value-based pricing: this is fine adjustment mechanism for everything you've figured during previous three stages. Think who's target audience for your product, and if there's something which makes your product more valuable for them than the rest of the market - price it accordingly. Simple example - luxury DSLRs (whose sensors, firmware and lenses are just as good as professional ones, yet luxury casing and a good brand name makes them significantly more expensive).
(I'm not a salesman, I'm an engineer, yet I had to sit through decisionmaking sessions about pricing services in 2 different companies over last decade, and found them very amusing - if you get to the core, the ideas are very simple, they're just surrounded by plenty of bullshit bingo and lingo).
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