EG151: Transparent pricing, the good, the bad and the ugly
Learning from other’s mistakes is cheaper and faster.
It can even be satisfying on some level, if the others are competitors and you can get ahead in the market by learning from their mistakes.
There are as many approaches possible to transparent pricing as there are post-it notes at your typical corporate off-site.
For anyone selling tech services, it is a difficult dilemma.
This week I am showing some examples from companies in the IT & software services sector, with my comments, in case you want to learn from them.
1. The good: Railsware ’s Discovery Session
They give a range of prices (3 to 5.000 EUR).
This information is highly visible on their homepage.
It seems to be the evolution of their practice of showing an hourly rate on the homepage (it was 80 USD around 2014 and 120 USD in 2023).
Since I don’t know what their objectives were, it’s difficult to judge how it could be improved.
I would change the name though.
Many years ago I was selling a similar service to a similar target market, startups. One potential client asked me in a call “You want me to pay you for discovery? So that your team spends time with me to document what is already in my head? Why would I agree to that?”.
I know, and you know, that discovery is a lot more than that.
But in my experience, many potential customers would think like my customer.
It’s easy to avoid this reaction and the pushback that comes with it by changing the name of the service.
Everything else stays the same; the team does the same work; the client gets the same deliverables. Just the name doesn’t use the term “discovery” anymore.
Flowout offers another good approach to transparent pricing.
They took inspiration from SaaS pricing and have created 3 packages, that are shown on the website, on a dedicated pricing page.
I think they took it too far though and have also applied some practices from SaaS that are not recommended for services.
A 10% discount for quarterly contract and a 20% discount for an yearly one work great for digital products, with their lower marginal cost to serve.
Such high discounts don’t work for services business, where the cost to serve is a much larger proportion of the cost base for each new project and client. And they are not necessary. Buying these types of services is not an impulse buying decision, where a higher discount might push a client to buy a subscription for a longer period.
Another problem with these packages is the choices they made on what to include in each of them.
There is a relatively small difference between the first 2 packages in terms of price.
The difference in what is included is even smaller. I can easily imagine prospects trying to figure out how they are different.
The whole point of having packages is to create trade-offs for customers with different needs and willingness to pay at different points.?
There is a big missed opportunity in the way Flowout designed their packages.
2. The bad: costs calculator from IT Craft
If you go on their website you will find a self-services costs calculator that any prospect can use to get an estimate for a project budget without the need to talk to anyone from the vendor’s team.
This is fine. It’s a valid approach to transparent pricing.
The issue I have with this implementation is twofold.
One, the calculation is only based on costs and a rather simplistic estimation of effort for the implementation of a number of features and modules.
It completely ignores the other 2 pillars of a healthy pricing process: competition and value for customers.?
Any price for IT & software services that calculated only based on costs is doomed to be wrong.
Either your costs are low, because you are very productive, have a very efficient operation or you are based in a region with lower relative costs. In this case, if you create value for customers and other vendors would have to charge more than you because they have higher costs, you have an opportunity to charge prices a bit higher than what you will normally get with cost-plus calculations.
If your costs are high, you will have to ask a high price when other vendors are cheaper. In this case, you have very few chances of winning the project. The solution is not to give a discount or work with negative margins, but to find another market and offer services at a competitive price that still allows you to be profitable.
The second problem is the structure of the financial proposal they send.
It’s one page with the list of features that were selected, the estimated number of man-hours for the implementation and the budget.
That’s it.
Nothing about the team. Nothing about the quality, their process, their certifications. Nothing at all about the value. Only the price.
Customers buy when they feel that the price they have to pay is lower than the value they receive.
If the offer only has pricing information, how is the potential customer going to evaluate if it’s a good price or not?
?
3. The ugly: sending the rate card by email automatically to anyone who writes on the website contact page
This rate card comes from an app development studio (size: 50-99 FTEs). They say they have design expertise, senior teams, proven delivery process, clients from Automotive and Healthcare, with delivery teams in Estonia and Belarus.
Think about it.
Any financial proposal you send to a potential customer is the result of a simple equation: effort multiplied by hourly rate (or any other usage metric).
The estimation of effort is largely out of your control as a vendor because it’s an answer to a list of customer requirements.
And you send the rate card from the first interaction, without even talking to the prospect.
What other lever do you have in the negotiation?
None.
There is nothing left for you to think about, adapt, change based on the information you learn about the potential customer.
It is not a good idea to send the rate card from the beginning.
There are much better ways to answer the pricing question in the first conversation with a prospective customer.
And that is the whole point with transparent pricing. To get ahead of the process, to show pricing to any new potential customer on your own terms, when and how it suits you.
?
The IT & software services industry is in turmoil. Three powerful macro forces are affecting the sector:
To thrive in this environment, companies need to equip their commercial teams with the right mindset, methods and tools.
Transparent pricing is one of these changes.
That’s why I am talking about this in my webinars and showed examples yesterday. Last week I tried to convince you to consider transparent pricing for your services.?
Next week (on Thursday Sept. 19th) I will present some ways to implement it.
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