Tomicide Solutions, May 2012

Eight Advantages Of Premium Pricing Strategy And Eight Disadvantages Of Economy Pricing

By Tom "Bald Dog" Varjan

Synopsis

Setting up its pricing model is a crucial part of every IT business. While IT bits and bobs are getting cheaper every day, pricing IT based on purely technology, as opposed to the value to the client, would lead to financial disasters.

In this article we'll take a closer look at some pricing options, and why a solid premium pricing strategy always beats economy pricing.

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Did you know that nearly 2,500 left-handed people die each year as a result of using products meant for right-handed people?

I mention this hair-raisingly exciting fact because even more IT companies kill their bottom lines every year by accepting the wrong clients, and those clients have the nasty habit of dragging their IT providers to the very pits of financial hell.

We have to accept the fact that many clients don't need IT support, but what they need is an external entity to take the blame for the mess management has created.

For instance, the client's security has been breached, but the breach is still contained. So, the company desperately wants to hire an IT firm, and then blame the breach on it, even to sue the IT company.

This is why IT companies must be careful about which clients to accept and which clients to reject.

One of the main selectors is your fees and prices.

Today we discuss eight reasons why you should charge premium fees and prices.

In my experience, clients who are willing to pay premium fees for your products/services are some of the best clients. Yes, they have high expectations but are willing to pay for it and respect you as a professional.

The reality is that the less clients pay, the harder it is to work with them.

I've heard several of my clients complain that their clients bossed them around and demanded idiotic things or else...

And they didn't say anything because they didn't want to lose the gig.

One big advantage of charging premium fees is that you get premium grade clients who can play nicely and honestly.

But what is a premium grade client?

Here are just some of their attributes...

The problem is that most IT companies don't have strong enough walk-away muscles to fire their clients, return their money and walk away from bad business. They rather gut it out because they get paid.

But the problem is that the footsoldiers who have to gut it out get paid the least. So, for them this work is the proverbial latrine duty, and they get paid peanuts for it.

But we have to...

Change From Volume Game To Margin Game

Many IT companies desperately want to sell more of their products/services, that is, increasing gross sales, but are pathetically negligent of increasing their margins.

Even those companies that make a truckload of money on the surface lose most of it after all the overheads are paid. And they do all the wrong things to make fatter margins.

Leverage of Price and Profit

A McKinsey study of Fortune 1000 companies, from the 70s, showed that, on average, a 1% price increase increases operating earnings by 11.1% (assuming no change in sales volume or costs of goods sold).

In contrast a 1% increase in sales volume leads to only a 3.3% profit increase.

Yes, while most IT companies are busy chasing the 3.3% by going after more clients, they neglect the 11.1% by failing to provide more value at higher fees for fewer clients.

The Leverage of Price and Profit Source: Michael Mara and Robert Roriello, "Managing Price, Gaining Profit," Harvard Business Review (September-October 1992): 85.

So, let's look at a few points of why it's a good idea to become a premium IT company and charge somewhere at the high end of the industry's fee structure.


1. By charging more than the competition, you pre-empt both your company and merchandise as being something different, something-one-of-a-kind. You can also offer better overall working experience than your competition. You put your firm on an upward spiral of improvement.


2. You can do exponentially higher quality (thus higher value) work for your clients. Think about it. A Ferrari doesn't take 10 times more time and effort to me make than a Ford. Yet, even an entry level Ferrari costs more than 10 times of a Ford. And there is a huge difference in the quality of service.


3. You can retain top-tier talent to provide top-drawer service. Unlike junk food joints that can produce consistent and predictable results using minimum-wage kids and rigid systems, selling high-margin stuff need both good systems and real talents, not merely workers. Go to a specific junk food joint and order only some deserts. The kid on the other side of the counter will ask you, following the rigid system, if you want fries with it.


4. You can create a fatter piggy bank to finance various initiatives in your firm. You can be more responsive to your clients, you can send your people to the best skill building programmes. You have more time and financial resources to respond rapidly to client emergencies which will put you head and shoulders above your competition.


5. You can better focus on servicing the few existing clients and stay in touch with your five star prospects. It means you can create value beyond the scope of the basics of your merchandise because you're not watching the watch and you're not on an airtight schedule.


6. Your overall sales may drop a bit, but, rest assured, your overall profit margin and cashflow will increase. If your cost of doing business is the same, a 10% fee/price increase means you make the same profit on 68%of your previous sales volume. So, choose now. What will it be for you? Volume or margin? And you can't have both.


7. Your people's morale, enthusiasm and passion will be higher and higher, because they know they are part of a firm that is going somewhere. Your people will be less stressed and more cheerful, which increases their ability to attract perfect clients. No one wants to do business with a miserable company staffed by minimum wage, minimum skill, minimum commitment frustrated people serving anyone with a pulse and a bank account.


8. Premium buyers are loyal and committed to the success of their projects. They also understand that business is a value exchange, not an all-for-nothing deal. They respect your boundaries, and, while they expect you to be responsive, they know you're not on call to them.


Now let's look at what can happen to IT companies that decide to forego the "premium" calibre industrial authority status, and remain "low-budget alternative" calibre replaceable vendors. If you've been there, then you know it's a rather shitty situation. If you've never been there, then avoid it like the plague.


1. Since, often due to financial constraints, these IT companies are forced to do some shortcuts, they attract clients who don't mind some shortcuts to save some pennies. Performing quality work is always undermined by cashflow problems. These substandard clients create bidding frenzy for "lowest bidders", so bidders can get to each other's throats for the pathetic reward. It means they live the rest of their lives from bidding frenzy to bidding frenzy, never achieving even marginal success.


2. Because their quality of work and overall service are constantly undermined by casflow problems, "budget" companies can never create the kind of perception that would attract premium clients who would willingly pay higher fees for the firm's services.


3. Since money is always an issue, these companies are forced to hire minimum wage workers, often the ones whose applications the competition has already rejected. Yes, these people cost less in compensation, but they can create exponentially less value in their performance. In time substandard clients further undermine morale, passion and enthusiasm that gradually lands the firm on a downward spiral.


4. These companies live in constant "client chasing" frenzy because their budget clients almost never do repeat business and hardly ever give referrals. So, an awful lot of the firm's time, effort and money are spent on acquiring new clients to sustain the already dismal cashflow.


5. Price buyers go for low price regardless of quality. And most companies serving this segment of the market don't mind compromising on quality in order to get more clients. This approach leads to arguments with clients over fees/price and quality, which undermines the company's reputation. And unhappy clients lead to unhappy employees.


6. Since these "budget" clients are also budget suppliers to their industries, the low-margin poverty mentality goes to the next level. Any problem they have with their "budget clients" rubs off on you. They pay late or give you reasons for not paying, "We expected XYZ client pay us, but they have cashflow problems." Cashflow and other problems ripple through several companies.


7. For "price" buyers, loyalty is an unknown entity. They squeeze the most out of their suppliers, vendors and consultants, and then kick up a big fuss about paying for the extra work they requested. This is the proverbial car buyer who buys a car, and demand free driving lessons and free insurance from the dealership to get a driving licence to actually drive the new car. And justify the free request because they've just paid a pile of money for the car.


8. Due to living on a shoestring, "budget" buyers have developed a scarcity mentality, and tend to see everything in the wrong way. They are looking for faults in people and errors in their actions. In their eyes everyone is out there "to get" them, but they've become "price smart" not to be ripped off by "premium" companies. They are pathetic negotiators but class act hagglers. They have a habit of wanting it all, now and for as cheap as possible.

Now, hopefully you can better see why it's in your best advantage to work hard and become a "premium" firm. You have a better life, get better paid and will be surrounded by higher calibre people. The good news is that it's up to you which end of the fee scale you belong to.

As the saying goes, birds of the feather flock together. So do premium clients to premium IT companies with premium talents. And mediocre clients flock to "budget" companies with "rest of the mediocre bunch" employees.

Choose wisely!

Come and let's discuss this newsletter issue on my blog...

Attribution: "This article was written by Tom "Bald Dog" Varjan who helps privately held information technology companies to develop high leverage client acquisition systems and business development teams in order to sell their products and services to premium clients at premium fees and prices. Visit Tom's website at http://www.varjan.com.