April 4, 2022

Pricing is Art: When to use range pricing and when not?

Howdy! 👋 Not gonna lie: today we will focus on a feature we added recently, that is a range (brackets) toggle next to hourly rates. It was one of the most commonly requested functionalities and will certainly come in handy - but it is not turned on by default for a reason. 

Inside the brackets

Up until the 1840s, prices were not a thing at all. Most good and services were agreed on by auctions and haggling. A simple "this will cost you X" is more recent than soft drinks and submarines. No wonder that problems arose and challenged this simple idea as time went by. You see, you're not the only one who curses and drinks beer after every meeting with a potential customer that cannot explain what they want. This has been going on for centuries and many tried to solve this issue. People love simple solutions, and the KISS way of thinking is exactly why brackets were invented.

The idea is sound: try to estimate the minimum and maximum of what your product or service might cost depending on the customer's actual needs that you will (hopefully, probably not) learn soon. This gives you some leeway and assures you will get adequately compensated. Obviously, the price can be the result of many different factors: how much you pay to the supplier, or how many hours of work is needed from you to deliver a product.

"This carrot will cost you between $1 and $10, sir. Now good luck with that shopping list and monthly budget of yours."

Upsides & approaches

The good news is - this indeed does work! If you have enough data (or luck), you may use price ranges as a rather effective tool in your sales efforts. There's a few different approaches to this:

  1. Looking for a fool - the lowest price bracket is your actual price. Anything above, all the way up to the maximum price, is just in case you find someone naive enough to fall for your bluff and give you more. Unsurprisingly, this is often used public tenders and government contracts.
  2. The fake brackets - you actually do have a pretty good idea of how much money you want. Maybe it's not a precise number, but very narrow brackets  - either way, you extrapolate the range in both directions just so it looks like an actual bracket pricing. You aim for the exact middle and would be happy with just that. Seriously why are you even using brackets???
  3. The reverse psychology - you have literally no clue how to price this project according to market standards. None at all. You did finish an online webinar about business and know that a product is worth as much as somebody is willing to pay for it, though. So you give comically large brackets (say, $15 to $300/hour) and basically make the customer figure out the price for you. If whatever they say sounds good, you got a deal.
  4. The negotiator - you operate like most businesses nowadays do: your general prices are quite high and you always assume discounts will be applied. The lower brackets are just that: if a customer wants to negotiate, the lowest bracket is your limit how low you're potentially willing to go. A clever discount scheme disguised as negotiations.
  5. Market positioning - you need to be priced just right, but you do not operate in a vacuum. What if Company A is 100% cheaper, and company B is 100% more expensive than you? Who is right? Well, all you need to do is take the highest and lowest industry prices and make them your brackets. This will ensure you are mostly in line with the rest of the industry. You will no longer wonder how on Earth is everyone else able to afford new office buildings, while you rent a basement in your parents' summer house.
  6. Socrates - I know that I don't know everything. As an intelligent person, you always try to be careful and hence your use of brackets. This might cost you some time & business, but results in less stress in your life.
business fool
"Pictured: the guy who will take your highest bracket right away with no questions or complaints. He probably exists somewhere. We're sure of it. Well, not really."

Potential issues

People are people, though. No matter your good intentions and industry best practices, your customers may turn out to think outside the brackets, the box, and human decency altogether.

Some will see the lower bracket and permanently engrave it into their brains' grey matter. You will never be able to go above even a cent or bill for an additional hour, the lowest number it is, logic be damned.

Others will seem more sane at first: they will inquire you about a website and say "yeah, these brackets are OK!". The next day you will get a 600-page specification detailing the use of AI, VR, 3D, sentient chipmunks and IBM Watson for their new consulting website. And guess what: any mention of "umm, this might go way above the original maximum bracket and take years" will be met with "But I accepted the previous ones!!!"

There will also be customers who have been living under a rock for the last 70 years. They will be shocked that you dare not to give them an exact time & price and take their business elsewhere. Most likely to a place that matched your maximum bracket or went beyond it, but gave a simple sum.

angry customer
"What do you mean by saying the cost will increase if we make our own smartphone for the app? You clearly said you need only servers and some coders, not a chip factory in Taiwan!"

Software side of things

Pricing software projects upfront is a guessing game, the output of which is usually a cost that someone has to cover - you or the customer. Prices stem directly from the number of working hours. The total price is too small? You lose the project or swallow the pill and make it either way. Or is your quotation too big? You might lose business, and if not, the customer will simply overpay.

Brackets are one of the ways to deal with the inherent uncertainty of software development. Not an ideal tool, mind you, and still prone to some risk - but an effective one if used properly.

When to use...

You should consider bracket pricing when:

  1. Your base your business on subcontractors, partners and external experts and time is precious. You will need to negotiate delivery times with them, and since this often takes a lot of time (damn you all, MLP artists on Fiverr!), you may want to use approximate brackets so your end customer does not have to wait an eternity.
  2. You have data to back up your pricing range, but not enough for a set-in-stone exact number.  This usually consists of past customer data, competitors and average industry rates. If you have a 100% legit prof that a project is between 15 to 20 billable hours, but no idea if the average is 17 or 18, brackets nicely cover this scenario.
  3. The customer supplied you with pretty good documentation upfront and you're REALLY sure the maximum bracket will fit and feature creep will not make it obsolete. This is common in projects divided into distinct stages, where the scope of each stage might change, but really big changes will need to create a full separate stage either way.

...and when you better not:

  1. The amount of data you have is shaky at best. Brackets will not fully solve this issue, you need data to know where to start and end your estimate!
  2. The customer insists on an exact number. If you ordered a Big Mac and got chicken nuggets instead you wouldn't be happy either, right?
  3. Your brackets are comically wide. If the difference between the lowest and highest amount is more than 25%, you're most likely deluding yourself and need more data either way.
"It's not the new Joker. It's the guy who has been pricing everything as between $1 and $1000000 for the last 40 years!"

Homework #4

We strive to make this series somewhat interactive. At the end of each article we will ask you questions ir give simple tasks. Today is such a day. Ask yourself this:

  1. Have you ever used price brackets?
  2. How did it go?
  3. Was this the correct case for bracket pricing?
  4. Would you do it again?

Tip: write down your answers as further reference will be useful!

Stay tuned for the next installment 👋

Michael Grubka
CEO at Apropo

Professional Salesman and Negotiator. 7 years of experience in IT sales with more than 70 deals closed and 500 estimates done. Co-owner of award-winning software development company.

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