Price Optimization 101

I get a lot of questions about price optimization, so I just wanted to make it really simple.

1. Write down your costs.  Of course, you won’t know your real costs, so just use estimates, preferably from 2-5 years ago.  These costs won’t include much nuance about fixed overhead, variable costs, service costs, customer acquisition, or anything else that will really help you understand your profitability, but that’s OK.
2. Build in a margin, based on your detailed cost estimates from step 1.
3. If sales reps discount below this margin, require that they get approval for the deal.
4. After spending a lot of time on email/phone/calls/meetings, and maybe even some analytics, approve 100% of the deals that require approval.

Whatever you do, do not attempt to understand the value of your offering in the market compared to customers’ alternatives.  How can you go wrong with cost-based pricing, especially with your detailed and accurate cost model?

April Fool’s, or they way most companies price?