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A Lesson in Pricing

by Todd Berkowitz  |  June 11, 2014  |  Submit a Comment

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My family and I are in the market for a house as our current dwelling doesn’t meet our long-term needs. Over the weekend, we saw a house with many great qualities in the same neighborhood that we currently reside and put in an offer. The house is far from perfect however. For example, it has three different kinds of wood floors, original landscaping and the kitchen, while recently updated, ¬†is configured in a very strange way that would require some modification. The market near me has very low inventory and this house did not have any offers prior to ours, even after a more than 10% reduction in price. ¬†Houses that are close to being “move-in ready” and are priced right are typically under contract within the first two days of listing. This one had been on the market for over a month.

We came in under asking price because we knew there wasn’t demand and because of the work required to meet our needs. Our offer was rejected because the seller said “the house next door sold for higher and they put in a lot of improvements.” In behavioral economics parlance, the seller is employing biases and heuristics to determine fair value, rather than letting the market dictate it. The seller became “anchored” around the price of the house next door and the improvements he made, suffered from “confirmation bias” by filtering out examples of other houses with the same model in the same neighborhood that sold for less, employed “proof by example” to rely on a single data point and had “cognitive inertia” by refusing to alter his previously held stance.

The seller had put in improvements like solar panels, reverse osmosis water filtration, whole house speaker wiring and more child-friendly railings. He ascribed a value to those and clearly enjoyed the benefits of them. But the market (including us) clearly didn’t value them in the same way and valued the house like the other similar models in similar condition. The buyer ended up taking the house off the market because no one would pay what he thought it was worth.

We spend a lot time working with clients to help them identify sources of differentiation. In only rare occasions do we see a client differentiate on having the lowest price. So provider pricing can be a bit of an art form. Software pricing is relatively fungible in that the marginal cost of the software is extremely low (although that doesn’t account for support costs). And there are certainly tangible costs when it comes to manufacturing hardware or providing cloud or professional services.

But we still see clear mistakes made around pricing. Some of it comes down to efficiency and a desire to make a certain margin despite that inefficiency and despite what the market wants to pay for a solution. But there are also clear examples that align more with the mentality of the property seller, especially when it comes to services. It usually stems from the idea that someone’s expertise or methodology is “worth more” and thus should be priced at a premium. The problem is that the market doesn’t always value these things. Buyers purchase solutions to achieve specific business outcomes. If your solutions (including services) don’t help better or more quickly achieve those outcomes, they aren’t going to pay more for them, especially when there are lower-priced alternatives.

Services are a perfect example. If you look at any particular technology, there are potentially dozens of providers that offer implementation, configuration and training services. Many of them do it at prices that are significantly less than the professional services staff of the solution provider.

So it’s worth looking at your pricing to see whether you are providing fair value (as defined by the market) for the solutions you are providing. If you are a Gartner client (who has purchased a PMM product), you can also work with our analysts to better understand pricing trends and competitive prices.

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Todd Berkowitz
Research Vice President
3 years at Gartner
18 years IT Industry

Todd Berkowitz is a Research Vice President focusing on B2B technology marketing and sales. He advises product marketing leaders, CMOs and sales enablement leaders on how to improve the effectiveness of their demand generation, sales enablement, account-based marketing and upsell/cross-sell efforts. He also looks at how data, analytics, content and tools can improve marketing-sales alignment and overall effectiveness.. Read Full Bio




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