4 ms·

It’s very easy to underprice your product

96 points by coglethorpe 18y ago

chops 18y ago
That was one of the first bits of advice in the book "Secrets of Power Negotiation" (something I read because I'm not a very good negotiator): Ask for outrageous concessions, you never know if they'll go for it. Lowball purchases hard and highball sales hard. Don't target what you think someone would rationally pay, just ask something ridiculous, and from there you've established your upper bound, and you'll work down from there. Yet when confronted with a situation like that, I still find myself hesitating (or forgetting I can negotiate at all). It's something I still have to work on. Fascinating story though, eventually charging 16x the cost you were originally charging ($1.2m vs $75k).
- jpwagner 18y ago
  Just read "starting from no" by Jim Camp. Similar advice...totally recommend it.
- nivi 18y ago
  Some people (like me) have a problem asking for things. "Hesitation" is why Steve Blank suggests considering hiring a "sales closer" when you get to the customer validation stage (the stage where you are asking for the customer's money). Regarding negotiation, low-balling and high-balling don't make sense in all situations. Especially if you are in a situation where the relationship between the negotiating opponents after the transaction is important. The best book for negotiation is "Bargaining for Advantage" http://bit.ly/HZwdW http://bit.ly/HZwdW. "Getting to Yes" is also great: http://bit.ly/oHSCL http://bit.ly/oHSCL. Avoid any negotiation book with "Power" in the title. =)
  - chops 18y ago
    Regarding negotiation, low-balling and high-balling don't make sense in all situations. Especially if you are in a situation where the relationship between the negotiating opponents after the transaction is important. I agree that there are circumstances where high/lowballing isn't appropriate: You don't go to a long-time customer and start negotiating for 10x the cost for the same service. But in the case of a new contract, that highballing will set the course for the following deals. You get more at the start, and the following deals will all follow a similar price-point. Furthermore, by demanding high at the beginning, and then coming down, the person with whom you're negotiating will feel as though he/she "won" the negotiation, due to the huge concessions you made "He was asking a million dollars for a plan and we got him for $250k." My point is you can highball and still have a solid post-negotiation business relationship. I will definitely be checking out your book recommendations though.
  - sachinag 18y ago
    You know, this is fascinating. I don't have a trouble closing - I have trouble cold calling and prospecting. In a negotiation, all you have to do is figure out the cost savings/additional revenue for your customer and find the highest acceptable price that's NPV positive for them. That's why healthcare sales people have all these fancy ROI models (built by third parties, wink wink) that they truck into sales meetings. It's much easier mechanically and emotionally to deal with a negotiation; it's much harder to randomly call people and be cursed at/hung up on.
  - daniel-cussen 18y ago
    People punish others when asked for too much. After all, asking too much is the etymology of arrogance.
- Brushfire 18y ago
  This is good advice if you never have to deal with the person again. In other words, this is the advice used by used car sales people, etc. In normal business negotiations this is very bad advice. Using tactics that ask for ridiculous concessions paints you as either stupid or manipulative. This type of attitude will get you classified as an asshole, and customers/vendors wont ever want to deal with you again. Negotiating a single deal with outrageous outcomes is not as important (for most businesses) as negotiating 200 deals successfully with the same customer.
windsurfer 18y ago
This article seems to talk about software in general. This would have to be the hardest product to price. It takes an enormous effort to produce it, but when it is complete, it is almost a public good. This article really made me start thinking about software pricing: http://journal.dedasys.com/2009/03/27/software-economics-public-goods http://journal.dedasys.com/2009/03/27/software-economics-pub... I'm not sure how to figure out how valuable software is, but I know it's a lot easier to figure out how valuable your time is, and that's a good place to start.
- davidw 18y ago
  If you liked my article, definitely go out and get 'Information Rules' by Varian and Shapiro.
axod 18y ago
Really interesting. We were having a discussion in #startups a while back about which is higher risk - advertising revenue, or selling to customers. This sort of thing makes me a bit uneasy - will the company pay $5, or $500k, will anyone else pay that? It seems slightly more like a lottery to me than advertising revenue. With advertising revenue you have maybe a few thousand advertisers all deciding the correct price to pay. If you're selling to customers you don't have that... Obviously the two aren't exclusive, and it completely depends what sort of product you're aiming to create, but I'm personally glad I'm not selling to enterprises - I'm not good enough of a salesperson :/
mburnett 18y ago
This "bounding box" experiment seems interesting but I think might be more clearly described in this way: Say "This product is free" to see what roadblocks and bureaucracies are in the way of your client actually using your product to a degree that you may generate a sufficient amount revenue. - AND - Say "This product costs 1 million dollars" to find out how much the client has valued your product at (i.e. they think its worth only $450K) Doing these things avoids you underpricing your product as well as revealing any additional hindrances or costs associated with adoption.
rythie 18y ago
Probably best if you do it all in one go, I wouldn't expect much in the way of repeat custom. I personally hate it when companies don't have a price list up front and use price discrimination. I tend to assume if there is no price there, we can't afford it - not sure if that's good for business or if you just to talk to the people with lots of money.
nazgulnarsil 18y ago
so would the corollary be that it's very hard to overprice your product? Well let's make the rule of thumb more explicit: hackers tend to undervalue their own products. Why is this? And what are some solutions? 1) We have many examples of free services that rely on ad revenue that we feel we are competing with Solution: realize that only massive sites can get away with this as a true business model. On regular sites this will at most be a lifestyle business. 2) Hackers overvalue money relative to their clients (understandable if you're working for ramen money, the first 24k a year is the most important) 3) Hackers undervalue their own labor because we have fun doing it Solutions for 2&3: um, stop doing that? 4) Hackers don't correctly value how much labor our product is saving people, and how much that efficiency is worth to them. Solution: This one can be fixed simply by knowing your demographic really well and putting feelers out. "how much would you pay for x?" does anyone else have any other reasons?
- run4yourlives 18y ago
  #4 nails it, but I see it slightly differently: Hackers don't realize that while what they do is easy for them, it is immensely difficult for the common person.
  - kaens 18y ago
    This is the real reason, at least for myself. My level of skill currently rests somewhere between "intermediate" and "proficient" with the languages and libraries I use on a day to day basis, in my opinion. I'm nowhere near a guru with anything I use - however, I can't even discuss the implementation of things I consider trivial with the people I implement them for, because there is such a huge divide in knowledge, and domain-specific language. I would have to spend a long time explaining basics before I could even get close to making the point I would like to, but would probably be able to explain what I needed to to make the point in 20 minutes to someone who just had some basic software development experience. It's very easy to forget just how much stuff goes on, and how much you have to take into account, and how much you learned to get to the point where you could implement what you did - even with what we consider to be very simple apps. As such, it is very easy to extremely undervalue an application.
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AlexTheFounder 18y ago
The right way to do it is to set your price high enough and to introduce a discount. Playing the discount % up/down you can finally arrive at the best price.

96 points by coglethorpe 18y ago

chops 18y ago

That was one of the first bits of advice in the book "Secrets of Power Negotiation" (something I read because I'm not a very good negotiator): Ask for outrageous concessions, you never know if they'll go for it. Lowball purchases hard and highball sales hard. Don't target what you think someone would rationally pay, just ask something ridiculous, and from there you've established your upper bound, and you'll work down from there. Yet when confronted with a situation like that, I still find myself hesitating (or forgetting I can negotiate at all). It's something I still have to work on. Fascinating story though, eventually charging 16x the cost you were originally charging ($1.2m vs $75k).

jpwagner 18y ago
Just read "starting from no" by Jim Camp. Similar advice...totally recommend it.
nivi 18y ago
Some people (like me) have a problem asking for things. "Hesitation" is why Steve Blank suggests considering hiring a "sales closer" when you get to the customer validation stage (the stage where you are asking for the customer's money). Regarding negotiation, low-balling and high-balling don't make sense in all situations. Especially if you are in a situation where the relationship between the negotiating opponents after the transaction is important. The best book for negotiation is "Bargaining for Advantage" http://bit.ly/HZwdW http://bit.ly/HZwdW. "Getting to Yes" is also great: http://bit.ly/oHSCL http://bit.ly/oHSCL. Avoid any negotiation book with "Power" in the title. =)
- chops 18y ago
  Regarding negotiation, low-balling and high-balling don't make sense in all situations. Especially if you are in a situation where the relationship between the negotiating opponents after the transaction is important. I agree that there are circumstances where high/lowballing isn't appropriate: You don't go to a long-time customer and start negotiating for 10x the cost for the same service. But in the case of a new contract, that highballing will set the course for the following deals. You get more at the start, and the following deals will all follow a similar price-point. Furthermore, by demanding high at the beginning, and then coming down, the person with whom you're negotiating will feel as though he/she "won" the negotiation, due to the huge concessions you made "He was asking a million dollars for a plan and we got him for $250k." My point is you can highball and still have a solid post-negotiation business relationship. I will definitely be checking out your book recommendations though.
- sachinag 18y ago
  You know, this is fascinating. I don't have a trouble closing - I have trouble cold calling and prospecting. In a negotiation, all you have to do is figure out the cost savings/additional revenue for your customer and find the highest acceptable price that's NPV positive for them. That's why healthcare sales people have all these fancy ROI models (built by third parties, wink wink) that they truck into sales meetings. It's much easier mechanically and emotionally to deal with a negotiation; it's much harder to randomly call people and be cursed at/hung up on.
- daniel-cussen 18y ago
  People punish others when asked for too much. After all, asking too much is the etymology of arrogance.
Brushfire 18y ago
This is good advice if you never have to deal with the person again. In other words, this is the advice used by used car sales people, etc. In normal business negotiations this is very bad advice. Using tactics that ask for ridiculous concessions paints you as either stupid or manipulative. This type of attitude will get you classified as an asshole, and customers/vendors wont ever want to deal with you again. Negotiating a single deal with outrageous outcomes is not as important (for most businesses) as negotiating 200 deals successfully with the same customer.

windsurfer 18y ago

This article seems to talk about software in general. This would have to be the hardest product to price. It takes an enormous effort to produce it, but when it is complete, it is almost a public good. This article really made me start thinking about software pricing: http://journal.dedasys.com/2009/03/27/software-economics-public-goods http://journal.dedasys.com/2009/03/27/software-economics-pub... I'm not sure how to figure out how valuable software is, but I know it's a lot easier to figure out how valuable your time is, and that's a good place to start.

davidw 18y ago
If you liked my article, definitely go out and get 'Information Rules' by Varian and Shapiro.

axod 18y ago

Really interesting. We were having a discussion in #startups a while back about which is higher risk - advertising revenue, or selling to customers. This sort of thing makes me a bit uneasy - will the company pay $5, or $500k, will anyone else pay that? It seems slightly more like a lottery to me than advertising revenue. With advertising revenue you have maybe a few thousand advertisers all deciding the correct price to pay. If you're selling to customers you don't have that... Obviously the two aren't exclusive, and it completely depends what sort of product you're aiming to create, but I'm personally glad I'm not selling to enterprises - I'm not good enough of a salesperson :/

mburnett 18y ago

This "bounding box" experiment seems interesting but I think might be more clearly described in this way: Say "This product is free" to see what roadblocks and bureaucracies are in the way of your client actually using your product to a degree that you may generate a sufficient amount revenue. - AND - Say "This product costs 1 million dollars" to find out how much the client has valued your product at (i.e. they think its worth only $450K) Doing these things avoids you underpricing your product as well as revealing any additional hindrances or costs associated with adoption.

rythie 18y ago

Probably best if you do it all in one go, I wouldn't expect much in the way of repeat custom. I personally hate it when companies don't have a price list up front and use price discrimination. I tend to assume if there is no price there, we can't afford it - not sure if that's good for business or if you just to talk to the people with lots of money.

nazgulnarsil 18y ago

so would the corollary be that it's very hard to overprice your product? Well let's make the rule of thumb more explicit: hackers tend to undervalue their own products. Why is this? And what are some solutions? 1) We have many examples of free services that rely on ad revenue that we feel we are competing with Solution: realize that only massive sites can get away with this as a true business model. On regular sites this will at most be a lifestyle business. 2) Hackers overvalue money relative to their clients (understandable if you're working for ramen money, the first 24k a year is the most important) 3) Hackers undervalue their own labor because we have fun doing it Solutions for 2&3: um, stop doing that? 4) Hackers don't correctly value how much labor our product is saving people, and how much that efficiency is worth to them. Solution: This one can be fixed simply by knowing your demographic really well and putting feelers out. "how much would you pay for x?" does anyone else have any other reasons?

run4yourlives 18y ago
#4 nails it, but I see it slightly differently: Hackers don't realize that while what they do is easy for them, it is immensely difficult for the common person.
- kaens 18y ago
  This is the real reason, at least for myself. My level of skill currently rests somewhere between "intermediate" and "proficient" with the languages and libraries I use on a day to day basis, in my opinion. I'm nowhere near a guru with anything I use - however, I can't even discuss the implementation of things I consider trivial with the people I implement them for, because there is such a huge divide in knowledge, and domain-specific language. I would have to spend a long time explaining basics before I could even get close to making the point I would like to, but would probably be able to explain what I needed to to make the point in 20 minutes to someone who just had some basic software development experience. It's very easy to forget just how much stuff goes on, and how much you have to take into account, and how much you learned to get to the point where you could implement what you did - even with what we consider to be very simple apps. As such, it is very easy to extremely undervalue an application.

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AlexTheFounder 18y ago

The right way to do it is to set your price high enough and to introduce a discount. Playing the discount % up/down you can finally arrive at the best price.