Choosing the right pricing metric

So much of pricing is about choosing the right metric. In other words, the dollars per what? Gasoline is priced in dollars per gallon (or per half gallon in some cases where the pumps can't display prices above $3.999-- how much do you think you can charge for the upgrade kit?).

A lot of software pricing debates come down to whether to charge per user, per CPU, per transaction, or per some other metric.

Now here's a great example of choosing the appropriate metric, courtesy of one of my favorite business gurus, Scott Adams.

Part 1.
Part 2.

How to Raise Prices

With the economy in the state it's in and the price of energy going up, a lot of companies are making some tough pricing decisions. Their costs are going up, squeezing their margins. Also, they are worried that if they don't take a price increase now, they are going to be leaving a lot of money on the table. At the same time, their customers are feeling the pinch.

This topic has got some attention on the blogs.

• Geoffrey James over at BNet offers 3 methods to Raise Your Prices and Keep Your Customers. I disagree with method #1, opening up your ledger, but the concept of using price increases in your supply chain to justify price increases to your customers is legitimate. Note that customers don't actually care about your costs, but the increases in your costs mean that the costs of competitive products are also going up. This doesn't help as much with indirect competitors. For example, airline price hikes based on fuel costs are reasonable because all the airlines are facing the same issue, but they don't work as well against online collaboration software that could substitute for a trip.
• John Quelch at the Harvard Business Review provides Seven Tips for Managing Price Increases. A couple of these tips stand out. Unless you understand the value you provide, it's hard to price well. And unbundling is a great way to pass on a price increase to those who value your full offering while reducing price (and your costs) for those who only want part of your offering. For example, you might increase prices by 10%, but offer a 15% discount for customers who can schedule delivery 2 weeks in advance.
  

"How are we different?" not "How are we cheaper?"

Most new businesses fail. They typically fail not because they can't deliver value, but because they can't capture enough of that value to turn a profit and grow. Capturing value requires a clear value message and an appropriate pricing policy.

Unfortunately, most entrepreneurs do not create a detailed value message and pricing plan. They start with a product (or service, I'll use the word "product" to refer to either), or even a technology and then they seek customers for the product. Then they try to sell those potential customers on the benefits of the product. Often, this involves a comparison with a better known competitor: "It's like ACME's offering, but better, and it's cheaper."(Read the rest of this post is over on the Bootstrap Austin Blog.)