Expensive is Better than Cheap When it Comes to Pricing

Pricing is a common question that comes up with first-time entrepreneurs. My preference is being on the expensive side rather than the cheap side so that the product is viewed as a premium offering, more money is available to provide the best experience, and to have some pricing flexibility in special deals (it’s always easier to offer a lower price than it is to offer a higher price when negotiating a deal).

Here are a few examples where the product is more expensive and why:

  • Pardot is more expensive than many of it’s SMB competitors because we believed in providing the best product and service possible at the $1,000/month price point, and this resulted in extensively staffing up our engineering and services team ahead of our sales team, contrary to what our competitors did
  • The Atlanta Tech Village is viewed as an expensive coworking space (thanks Lisa for the comment), compared to others in town, because our goal is to be the best available, so we’re in a Class A midrise building with 12′ ceilings, free food and drink, fiber internet (~$40,000/year), a top-of-the-line Meraki wifi network (~$70,000 up-front), and more
  • Tesla’s first car, the Roadster, was an expensive $100,000+ sports car, based on a Lotus, used to prove an all-electric car could be great, and pave the way for progressively building more affordable cars

Better, faster, cheaper — pick two — is a common saying for entrepreneurs. I prefer the first two and not the third. Expensive is better than cheaper when it comes to pricing.

What else? What are your thoughts on being more expensive, all things equal, for pricing?

6 thoughts on “Expensive is Better than Cheap When it Comes to Pricing

  1. David great post. I agree with you. I think in a crowded marketplace many entrepreneurs make the mistake of getting caught in the pricing conundrum that leads to a marginalization of their product or service. They get distracted into believing that they need to pursue cutting of corners that allow them to compete at or near pricing levels of X or Y. In reality, if they’ve got something great that is of high quality, significantly differentiated in the marketplace and delivers a high value they need to shout from the roof tops and get their sales people aligned to selling the value and steering clear of time wasting exercises for clients that are trying to get the blue-light special. There will always be a segment of the population that appreciates quality and is willing to pay for it. I’ve found in my own experiences that often times my best clients are those that say up front that they aren’t expecting the “cheapest” but instead want the “best”. That’s always a great conversation to be a part of and is the mark of a client that get’s it and a relationship that will evolve positively.

  2. Well said and logical however a classic success story I’d the Walmart model. Create great value, sell with good service and run the retail world. I’m not sure that my comparison fits the software model David and I must say your success in Marketing Automation was amazing but I wonder IF the multi pronged approach to the business might not work well too. Say for example your sales staff pushed the more robust product and once realizing the client either didn’t need it all or was not able to afford that product you kicked the lead down to the mass appeal team who closed the prospect with a lower entry product like Paradot (light) better to close with something than nothing? Thoughts?

    1. I completely agree with David. ALWAYS price something more than you think you should. Wanted to share a couple of thoughts about how to maximize revenue through pricing when a sales person is involved in the sale:

      1. Variable Pricing
      Going back to my Economic theory classes, each individual is willing to pay a different price for your product based on their preferences, so maximize the price each individual pays and you’ll maximize your company’s revenue — a procedure known as variable pricing. (Note: Exclude any deals where the long term revenue doesn’t cover all of your long term costs).

      2. Reality: The Sales Person Sets Pricing
      It’s not easy but it’s up to the sales person to determine the maximum amount each buyer is willing to pay or how much to discount the price in order to get the deal done. By setting the price high, the sales person has room to negotiate down to the appropriate level while still keeping the price above your long term costs.

      3. Naysayers
      I know what some of you are thinking — “High prices will scare off clients” — and you’re wrong (for the most part). High prices will scare away people for three reasons:
      a.) It will definitely scare off the penny-pinching clients who usually have no loyalty except to price. At the end of the day, what startup wants those customers as clients anyway because you’re usually not making any money on them but are surely devoting resources to making them happy.
      b.) High prices will definitely scare away people if you haven’t clearly explained your value proposition. Yes, the quality of your marketing materials/sales people can dictate how much you charge. In this instance, the value of your product is still there but the customer cannot see it. The fault is on you (the company) not the customer for being scared by your high price.
      c.) Clients will walk away if they don’t know the price is open to discussion. At my first startup we didn’t publish our prices because we didn’t want to scare anyone away. Interested customers would inquire for pricing and then we would set up a call to discuss the value and what they were currently spending on a similar product (a good gauge for how they value the service). My company’s prices were never discussed until the end after the value was sold.

      Eager to hear other people’s thoughts…..

  3. Pricing also serves as a good reference point or anchor, which can be particularly useful for a new or unique product. If something is priced at $1,000, the prospective buyer may want to negotiate, but is much more likely to offer something reasonable to the asking price, as opposed to, say, $200. Additionally, as David alludes to, once a company signals what it thinks its product is worth (via price), it is much more difficult to raise the price than to lower it.

    As for the specific examples provided, I don’t know that I would characterize any of them as expensive. In the first two cases, the product is offering more value than the competitive set. Prospective customers are evaluating that and choosing the higher priced product, so they must perceive the value — either the product can lead to a higher ROI on their own products or the combination might mean some costs need not be incurred elsewhere. (As a tenant at Atlanta Tech Village, all the things mentioned justify the pricing, but the real value, in my opinion, is the ongoing interaction with like-minded entrepreneurs.)

    In the final example, Tesla is extracting value from the scarcity of the product, not necessarily its inherent value. Some people will want to be the first to have the Tesla and Tesla is capturing that value.

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