I came across this quote from Marc Andreessen while reading “Tools of the Titans” by Tim Ferriss:
“The number-one theme that companies have when they really struggle is they are not charging enough for their product.
It has become conventional wisdom in Silicon Valley that the way to succeed is to price your product as low as possible, under the theory that if it’s low-priced, everybody can buy it, and that’s how you get volume.
And we just see over and over and over again people failing with that because they get into a problem called ‘too hungry to eat.’
They don’t charge enough for their product to be able to afford the sales and marketing required to actually get anybody to buy it.
Is your product any good if people won’t pay more for it?”
The man speaks the tru tru.
Cutting your price is cutting your own throat.
If having access to solid cashflow – and a strong bank balance – defines how strong your business is… And if marketing (at its core) is all about doing the things that lead to a more solid cashflow and stronger bank balance… Then pricing low must be the antithesis of marketing.
It’s a tough temptation to make.
One of my previous ventures sold a lifetime license for our very popular piece of software for $97 – almost certainly less than we should have.
We made the money on volume – not margin.
But when the volumes started to dry up, there weren’t a huge number of options – and certainly no vast cash reserves to tap into.
As Marc Andreessen says:
“They don’t charge enough for their product to be able to afford the sales and marketing required to actually get anybody to buy it.”
In my humble experience, the biggest factor affecting price resistance isn’t what the market is willing to pay.
It’s the resistance from within the organisation itself.
One of the most valuable tweaks you can make to a business’s sales funnel is to simply raise prices.
For a business running on 30% margins, a 10% increase in prices means a disproportionately-large leap in profits of 21% (from 30% to just over 36%).
“But our customers won’t pay that much.”
I know. I hear you. I’ve heard other businesses say that too.
And then they’ve tested that assumption and discovered their customers were indeed happy to accept the higher pricing.
Usually with no discernible decrease in sales volumes.
Always with an increase in overall profits. It just means testing a higher price – not committing to it.
“But our customers are different to other customers.”
This is about the point where I give up arguing.
What I’m really hearing is “I don’t have confidence in myself, or my product.”
Or “I don’t want to risk paying the price of potential rejection, in order to reach the potential promised land.”
Either test it.
Or increase your lead volumes so that you don’t need to worry about the few people who say no to your higher prices – because you have the confidence that comes from knowing there are plenty more sales where that one came from.
But one way or another, don’t ignore the immense value there is in price-testing.
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