We stress so much about that number that we tend to forget that “price” isn’t a single number to our customers.  When customers consider “what something costs”, they’re actually measuring three main drivers:

Money: The obvious one.  What am I going to pay in dollars and cents?

Mental energy: How much do I have to think about this?

Time: How long will it take to learn/deploy/configure?

As you can probably guess, these points aren’t independent. The reason “free” is so psychologically powerful is that it entirely removes the “money” axis and strongly reduces the “mental energy” axis.

I don’t have to think about “free” at all.  Paying even one cent – that requires some mental energy.  I need to enter a credit card number, or remember my PayPal password.

For someone who works in a large-ish company, a $500 purchase may be very low mental energy – they can charge and reimburse it without additional work. A $501 purchase might mean writing up a description, asking for pre-approval, getting a signature, having to write up a purchase order… a huge increase in mental energy over an additional dollar.

Time and money are related when the product requires expensive consulting, or steals an expensive internal resource from whatever they were working on previously.  Also, long deployment cycles can mean paying for a service for months before starting to see the benefits.

Which shape should your pricing triangle be?

Market maturity and customer priorities determine how high or skewed your triangle can be.

Commodity Product, Mature Market

For example, a product in a mature market that has seen commoditization can’t be very high on any dimension.  If I’m looking at, say, dryer sheets, I’m not going to choose an option with a higher price tag, or a set of warning labels and detailed instructions, or one that increases drying time.

I just don’t care enough.  Some dryer sheet maker would have to come up with a truly disruptive innovation before I’d even consider increasing my “cost” on any axis.

New Technology, Early Adopter

On the other hand, take the first-generation MP3 players.  They were expensive.  You had to find software to rip your CDs, and then often another piece of software to load the music onto them.  It probably took 45 minutes to load up my Diamond Rio for the first time with a whopping 45 minutes’ worth of music.

The early adopter is okay with spending more money, expending mental energy, and spending time futzing with this new product.  Everyone else… is not.  This has led many a product down a bad path.

Cash-Poor, Time-Rich

If your target customer is a high school or college student, this is what your triangle may look like.  Don’t incur costs trying to make the installation faster or the instructions easier – do whatever you can to make it free or cheap.

Time-Poor, Cash-Rich (or adequate, anyways)

Why does Amazon OneBox exist when BitTorrent is out there?

Because to this audience, it’s not worth the time of searching for a specific episode among a bunch of crap, waiting to download, dealing with corrupted files… when you could just pay a couple bucks and get your missed TV show with One-Click.

For this market, don’t worry about your pricing being too high.  (If it is, you won’t permanently scare people off; they’ll come back when you adjust it.)  Worry A LOT about how to make the purchase a no-brainer.  Write better documentation. Streamline your checkout process.  Invest in making deployment incredibly fast and easy.

OK, not quite.  But not all customers are created equal, and not all have the same impact on your bottom line.   So start by figuring out where the value lies and how to measure it.

A couple years ago, I was talking with a customer, a bank business analyst, and she told me that they had solid data on three clusters of customers – the top tier, who through very high net worth and using multiple bank services brought in 80% of revenues, the broad mainstream tier that collectively brought in 40% of revenues, and — wait, isn’t that 120%?  … That’s right, the bottom tier of customers actually lost the bank money.

Remember that the next time someone blithely reminds you that “the customer is always right”.

What can the Pareto Principle do for you? (Laserlike)

…Find out what separates the top segment from the other segments.  If you have multiple products, do they buy certain products more than others?  Use certain features more than others?  Where do they come from and can you tune your marketing to find more customers like your best customers?  Does your analytics effort measure overall metrics as well as the health of your business by segment?

Understanding your customer segments can reveal hidden pockets of revenues.  Some customers (like the ones with the $10MM of assets in your bank) are obviously valuable.  But the smaller yet stable customer may require less hand-holding and do more positive word of mouth for you.

Make Every Customer More Profitable (CIO Insight)

The program certainly helps boost business from high-rollers…but it has also helped Harrah’s identify a profitable segment of customers that it had been under-valuing: the low-rollers, the so-called “retail” or small gamblers who spend no more than $50 per visit, but who represent about 40 percent of Harrah’s business.

Once you know your good customers, how far do you go to make them happy?  It’s important to know what you should — and should not — negotiate on.

The Art of Saying No to a Customer Paints a More Profitable Picture (Brews News)

We have found that negotiating with potential buyers, especially on price, never works out well for us.  Never…  So, engaging in a conversation about price is a waste of our time and even if we successfully negotiated a cheaper price and got the sale, we would not be making a profit which is the point of being in business.   And, most importantly, the negotiation process … takes away precious little time that we could be serving customers who are ready and willing to pay our stated price.

For one of my products several years ago, we had a big-name customer lined up to buy it… as long as we removed a feature (forcing consumers to use a more profitable but less user-friendly option).  That was a hard lesson that you can’t negotiate on usability.  If no one uses your service, it doesn’t matter how much you make per user.

Some more good related reading:

• Making Existing Customers More Profitable
• Five Steps to Understanding Customer Retention
• Customer Profitability

You don’t hire a professional just because you don’t have the hours to do some hammering and electrical wiring; you’re also hiring their experience and the knowledge they’ve built up.

A good contractor will recognize that your ideas about kitchen design will leave you tearing your hair out later when you realize there are no outlets to plug in the blender, and propose alternate suggestions.

The same thing applies to your customers.  They aren’t buying software – they’re buying problem solved.

I hear some of you saying, “yeah, but I’m not a consultant!  It’s not scalable to look at every customer’s unique situation.”  To that I say:

• Is there more than one way to use your product?
• Is your product delivered as a white-labeled or configurable service?
• Do your customers make decisions on how your product is used, discovered, or integrated into their existing websites or processes?

If you answered “yes” to any of these questions, you need a Best Practices guide for your customers.  Without one you are not providing a whole product solution because you’re not providing your experience and subject matter knowledge.    How else can you maximize their chances at success and satisfaction?

What belongs in a Best Practices guide?  Well, it’s going to depend on your product, but you may want to think about:

Installation / Integration. In an ideal world, how would a customer install or integrate your product?  If you yourself are not the installer/engineer/IT person, find the person responsible for this internally and ask them.

More often that not, you’ll hear something like “well, of course they’ll want to create a new database table for that”… something that would NOT be obvious to your customer. Especially if you’re selling into large companies, IT resources are limited.  Their engineer shouldn’t have to read through dozens of pages of installation manual to know that they will need the DBA’s help installing.

Configuration. What are the impacts of certain configuration options?  Will enabling feature X decrease performance?  Does disabling feature Y make the product far less usable?

A few years ago, I worked with a customer who wanted to disable a feature.  Users of our web application could either pay a bill one time, or opt into having that bill automatically paid.  The latter was more profitable to the customer, but caused many users to exit the registration funnel.  Because we did not clearly communicate the usability and usage consequences of disabling this feature, we had a lose-lose situation.

User Interface / User Experience. Are there text labels or headlines that draw more users’ attention?  Should/shouldn’t your web application open a new window?  Have certain visual designs resulted in better performance?  Show screenshots of customers who are seeing good results.

Demos, Help, or Splash Pages. What works in getting new users up to speed with your product?  If Flash demos make it seem dead-simple, recommend that your customers create one (or better yet, offer them a bare-bones generic on.)  If you’ve noticed higher registration completion when the splash interstitial says “free”, that’s information your customers should know before they start creating their branded splash interstitial.

Customer Service Responses / FAQs.  What questions can your customer’s service people expect to get?  How should they respond to certain questions?  You may not think it’s your job to create canned answers for someone else’s customer service rep, but no one else has the same combination of a) invested in the product’s success and b) deep product knowledge.

Expectations. If the customer takes all of your recommendations, what benefits can they expect?  BE HONEST.  You need to make it clear that following your recommendations are worth their while; you also want to set expectations appropriately.

This list isn’t comprehensive (it’s probably too web-application-centric to be that) – but hopefully it gives you somewhere to start on your document.  If in doubt, brainstorm.  What do our best customers look like? What do our bad customers look like?  and use that to identify your best (and worst) practices.

Note: if you’re lucky, you have “good” customers to reference.  I haven’t always been that lucky.  With one of my products, the first customer, the one that was supposed to be the Reference Customer, had a terrible deployment.  Through web analytics and raw input from their customer service department, I was able to identify what they’d done wrong.

(But I didn’t – and would not recommend – writing the guidelines as “Don’ts” instead of “Do’s”.  Instead, I took the opposite of what they did and codified those as guidelines.  When other customers asked, verbally I would admit “here’s what another unnamed customer did and the bad results we saw” but I don’t generally recommend putting negative recommedations in writing.)