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The price needs to be right

Facebook decided early on that they will be giving away their product for free. They will gain momentum by leveraging economies of scale to grow fast. Once they reached a sizable user base, they started to monetise the platform.

An early decision of charging a fee might’ve dealt a defeating blow in the early years of the company. 

Today, more than ever, it is becoming more important to price your product or services correctly, as your company health (and your livelihood) might depend on it.  

Negotiating price

All clients have a budget in mind – even if it is on a subconscious level. The number they have in their mind’s eye is of what the deliverable is worth, the market value and/or how much money they are willing to spend.

No client has an endless supply of cash from which they can draw from. 

It’s therefore important to know early on in a project what the budget it and what you would need to deliver within the parameters. 

As a professional, it’s important to talk about money early on in the conversation. Your time is valuable and you don’t want to waste their time either. 

When the time is right (as early as you can), start talking about costing and financials. One might argue that the customer needs to be eased into the talk, yet we need to realise that we are sacrificing our time that could be used to find other clients.

Have the tough conversations early on in the relationship.

Costing models

There are many models that business owners use to decide on pricing and costing. Many PhD’s have been done on the matter, but for this article, let’s simplify the models. Here are some examples:

  • Cost-plus: Adding an amount or percentage above your base costs. For example, if you hire a developer who charges per project, add a percentage on top of that for your profit.
  • Competitors’ pricing: Some services require an analysis of what the market is willing to pay for something. For example, the going rate for a 3-star guest house in a certain area has a range of what can be charged.
  •  Perceived value: A customer has a perceived value of what you’re offering them. For example, a developer wrote a code library for machine learning. Even though this might be simple to implement, there is a perceived value that will be added to the purchaser. 

Costing for services

There are generally two ways of pricing a service: an hourly rate or a project-based rate. For freelancers, this is challenge, whereas for established businesses it is taken in their stride – the experience with clients pays off!

With the above models, we can get an idea of what to charge. Here are some examples:

  • A customer requires project management and software developers for his project.
    • The software developers quote you a project fee to complete the solution.
    • The cost-plus model can be used to add a markup on the work of the developers
  •   A customer requires a software solution that has a business requirement specification in place already for a document management solution.
    • for longer-term contracts, the developer can charge an hourly rate that is in line with the current market conditions.
    • He can also charge an extra fee on top of this rate for specialising in the above field, and because he adds more value than just coding.

Complex services pricing scenarios

Some scenarios are more complex. 

Take for example a startup that is looking for a software developer to develop their product or someone looking for an eCommerce site that looks like their competition’s. 

In such scenarios, it’s vital to understand the scope of work that needs to be done. A business requirement specification needs to be in place with the full scope of work to protect the small business from over-investing their time and money into making a project work for a client – at the cost of their business. 

Scope and pricing

In some industries, it might be necessary to have a diagnostic phase where a proper scoping of the problem that needs to be solved can be achieved. In software development and design, the scope of a solution needs to be defined on a per-client basis, as each has unique requirements.

As a deliverable of the diagnostic phase, a business requirement specification (BRS) should be issued to the client. 

Pricing a product

Costing products tends to use the cost-plus model. This will ensure that the product is not sold at a loss. In some cases, there are scenarios where the pricing is not that straight forward. Examples of these include:

  •  Software as a service (SAAS): A monthly charge to use an online service
    • The cost-plus model can be used to determine the running costs.
    • The value the service adds to the client’s business determines if a premium can be charged.
  • A code library is sold that enables file format conversions.
    • A competitor analysis can be done to determine the going rate of the service.

Conclusion

Pricing a product or service is not easy. In many cases, in-depth research and a business requirement specification is required to give an accurate estimation of the work required. 

Do not quote in haste, as you will be bound by it.

Happy simplifying.  

Sources


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