Why Are Founders Still Ignoring This Simple Way To Increase Profit?

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It’s not every day that you see truly amazing stats, but it’s something any entrepreneur should rock in their shoes. The average SaaS company spends just 6 hours setting its pricing strategy. Now, that’s not 6 hours every month or every quarter. This is 6 hours in the entire lifetime of a business. Ask any founders how much time they spent choosing fonts and layouts or adjusting the size of a logo in a document’s header. The answer will, of course, be orders of magnitude longer.

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Not giving time for pricing means that entrepreneurs miss out on a significant part of customizing their business. They already work to optimize everything else, and the pricing strategy can significantly impact their company’s bottom line. The investment required to customize it is small relative to spending hours and wasting labor on choosing the right font.

RELATED: How SaaS Is Changing the Way We Work

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A widely cited Harvard Business Review piece published thirty years ago has already made a case for optimizing the pricing model, and yet, the founders haven’t caught on. In the article, aptly titled “Managing Value, Gaining Profit,” the authors assessed how much a price increase affects the average company’s bottom line compared to an increase in volume. The price won almost four times as much.

With such high leverage on price, even if a company’s managers are spot on in their pricing 90% of the time, improving it to 92% is a huge payoff. Even though these results were confirmed years later in a McKinsey study, it seems the founders are still following back on the issue. It’s also worth noting that pricing is a double-edged sword – if a 1% price increase can improve your profits by a significant margin, a 1% price cut can hurt them.

What is it that represents the price?

Companies are often the price the customer is willing to pay, but this can be a mistake. This approach fails to consider the thousands of moving parts that need to work almost in unison, like magic, to deliver value. The price should reflect that.

Researching pricing can be overwhelming because of the vast number of pricing models, strategies, and tactics available, so it’s nearly impossible to know where to start. And frankly, there is no shortage of mistakes you can make, i.e., pricing is based solely on undercutting your competition, not dividing customers, not trying for enough price points, pricing presentation. more complicated, and dozens of others. But thankfully, in the tech world, talks about pricing are ongoing, and there are some surprising and exciting developments out there.

A bunch of notoriously priced products are legal matters. If a class action lawsuit has a 50% chance of reaching a ten million dollar judgment or settlement, the estimated value of the case is five million dollars. However, valuation of commodity legal cases is usually drawn from gut feelings and the lawyers’ own experience.

Pricing and valuation is virtually a neglected area in relation to revision of legal matters. An AI-powered justice intelligence platform called Darrow has captured this and developed an algorithm that uses big data to accurately value legal cases. This platform fetches reasonable prices and opens doors for new investment opportunities.

Since software-as-a-service is a relatively new concept, it makes sense to move away from the old-fashioned pricing model. We are no longer in the 90s, and the SaaS buyer experience needs to reflect that. For example, software company Stig has built software and APIs that give companies fine-grained control over what is individually priced and packaged, helping businesses send better plans to their customers. .

The irony of using software for pricing is that management probably won’t spend more than 6 hours deciding between freemium, trial, subscription, usage-based pricing, etc. But at the very least, a program executive is thinking in place. Such software may serve executives especially well today as companies cut costs, slow hiring, and search for ways to increase productivity.

Thirty percent of CFOs are considering layoffs, according to a new Grant Thornton survey, and most are expecting a recession to come. Considering the state of the economy and rising inflation, companies can no longer afford to hire on board people who aren’t holding their weight, and the decision to cut a certain amount of time is completely understandable. But sometimes cuts — especially in layoffs and reduced benefits — hurt morale.

Finding ways to maximize profits should be a top priority before resorting to deductions, and updating pricing is an excellent place to start. Pricing is too important to be left only for ad-hoc decisions and gut feelings, and industry leaders will benefit from remembering that.

Related: Don’t try to maximize growth and profitability at the same time. It’s impossible.

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