3 Triggers to Evaluate Pricing
We’re often asked what should naturally trigger a pricing assessment. Below are three cases where we believe you should evaluate your pricing.
Contract End or at least once a year Costs may have changed in a year or since the last contract and pricing should reflect those changes. Also, your value may have shifted—did you have exceptional results for your customers? Would your customer be willing to pay more for even greater results? Pricing is so important that Warren Buffett says pricing power is his number one consideration when evaluating a company. He also said: “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
Raising Funding While raising a round, pricing and the structure of your pricing might help or hurt your valuation. If your pricing has 2 components (a one-time fee) and a recurring payment, your recurring payment gets a higher valuation. Therefore, if you have flexibility, you should adjust your pricing so the recurring payment is more significant. If a customer is willing to pay you $1,000 for a service ($800 one time and $200 in recurring fees), they may be willing to pay you $500 in one-time fees and $500 in recurring fees). That little difference adds a lot to your valuation. If an investor values your recurring revenues at 3X you’ve gone from $600 to $1,500 in the valuation of your recurring revenues. At 5X, it’s $1,000 to $2,500. Another benefit the lower one-time price is an increase in sales since you lower the bar.
Demand Increases A real estate developer once mentioned they upped prices every time they sold 3 homes. Does it seem that the pricing sheets at developments always have that just-printed non-glossy look compared to the rest of the package? The point is you should have set criteria around how to respond to demand. You don’t have to take it to the Uber surge pricing extreme, but a slight change can add up.
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