Profitable Pricing

By September 6, 2008blog

I’ve had several conversations this past week about how to structure profitable pricing models. Thanks to the guys at Ignighter, Poll Everywhere, and Filtrbox for the great debates.

My philosophy on profitable pricing is simple:
1. Price high enough to make a great profit – I believe that a self-sustainable business model should be able to make a 20% profit at $1 million in revenues. To do this, I start with estimating what ALL my expenses will look like at a million in revenues to find out if I’m charging too little to make a 20% net profit. I’m continually surprised at how few “For-Profit” business people there are out there with a consciousness towards pricing to get to profitability quickly. It seems that most of these companies think that they will eventually make it up in volume.

2. Price low enough that 80% of core prospects will feel it’s fair and reasonable. I’ve seen the smile on prospects faces at tradeshows when I told them our pricing. I’ve also seen that 20% of my prospects didn’t like the price. Both of these are positive because it shows that the product was priced high enough to lose some but still capture 80% of my target market without having to sell too hard.

3. Price in a way that fits the way prospects want to buy. We constantly hear prospects and clients echo back to us that they LOVE our pay-as-you-go per-registrant pricing. Prospects also complained about how our competitors were asking for too much upfront. Would the prospect rather pay upfront, monthly, per unit, per user, per project, etc? Creating a structure that resonates with how people like to buy is HUGE. It’s even better when it’s a differentiator, like in our case.

4. FOCUS on your sweet spot in the market and forget about the rest. I knew our sweet spot was small to medium size events that needed more than just a rsvp form to signup and less than an integrated enterprise solution. I constantly see companies try to be everything to everyone – in markets they have no right being in, spreading themselves and their profit margins too thin – which takes away their competitive edge in their core market. I say OWN your core market. Price higher for it and make more profits in that core market, instead of trying to be too little to too many markets.

5. Freemium models (free to use unless you want more advanced functionality) make sense in consumer markets, but make no sense to me in business-to-business markets. They devalue the core businesses and pricing models and usually are a drain on resources. Providing a free 30-day trial makes more sense. I like the idea of customers that PAY because it helps make for a more profitable pricing model.

In short, what’s profitably worked for me is to price high enough to still capture 80% of the core market. Structure the pricing so it resonates. Stay focused on pricing for one market. Use free trials instead of freemium models for B2B. I could go on forever on this topic. Feel free to agree, disagree, or add to the discussion…

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