Pricing your products/services through Floor and Ceiling concept
Pricing is as much an art as it is a science. There are two major concepts that needs to be taken into account before pricing – Floor and Ceiling.
Floor is your cost, such as, the cost of building a product plus management overhead plus other resource cost. You obviously don’t want to price below the floor unless you have a well thought out strategy.
Ceiling is the maximum price your customer is willing to pay for the product/service. But note that each customer can have a different ceiling, which is why many software products don’t offer a flat price. They will figure out the customer benefit before pricing the product.
Ideally, you want your product to be as close to ceiling as possible. And of course, you’ll have to take into account your competition’s pricing as well.
The art portion of pricing is really figuring out what your customer is willing to pay so you don’t underprice yourself. There’s a joke on pricing as an art which is an interesting analogy.
A customer walks into an optical store to buy a pair of glasses…
Sales person: It’s $100
Customer: Ok (says it without flinching)
Sales person: That’s per eye
Customer: Ok (says it without flinching)
Sales person: Transition lens is another $25
Customer: Ok (says it without flinching)
Sales person: That’s per eye
Customer: Ok (says it without flinching)
Sales person: Scratch proofing is another $15
Customer: Ok (says it without flinching)
Sales person: That’s per eye
Customer: Ooook (starts getting uneasy about the price)
At which point sales person has figured out the maximum price the customer is willing to pay and makes the sale.
For ideas on how to set an optimal price, read this great article from Joel Spolsky – Camels and Rubber Duckies
