Set your pricing too low and you risk loosing customers

Ah the dark art of pricing. All too often, we as engineers think the only honest way to price something is to take what it costs, add a reasonable margin on top, and call it a day. And get outraged when someone has the gall to charge money for goods and services. How many of you pay for YouTube premium?

I'll telling you that way of thinking - that just adding a reasonable margin on top - is wrong.

I mean it's reasonable and makes sense from first principles, but we're not in first principles territory here, even for a brand new product because we've been paying for things with money since money was invented in prehistoric times. The sooner we learn that the price of something has nothing to do with what it cost to make, the better we'll all be for it. Now obviously we want the price to be greater than the cost, for longevity reasons, but nothing lasts forever, so things frequently can be found on sale for less than it cost to make them.

The price, and value of something is whatever someone is willing to pay for it. If an eccentric billionaire wants to buy a newspaper for $44 billion, then it's worth $44 billion. Similarly if someone wants to buy used underwear for $300, that's just what it's worth. We're spoiled by our stores charging a fixed, same price on items to everybody. We never have to face the fact that the numbers are all made up anyway.

Market forces are the best way to find the intersection of supply and demand given a marketplace of suppliers and consumers, but we've gone too far with it and lost the plot. The price for baby formula should be $0, not locked up behind the counter in low-income areas.

At university in the 00s, I used to sell various bits I'd imported from China - initially fresnel lenses and 'mini aerials' back when phones still had aerials.

They were really cheap to buy and ship, but if I sold them for anything less than £5 plus postage my sales would drop like a stone. As a nod to the price conscious I'd sometimes also do penny ebay auctions to try them at lower prices, but often the bid amounts would reach or exceed the buy it now prices.

Good photos and descriptions helped set a 'standard' for what I was selling, at a time when plenty of things online didn't have these. But a tiny bit of searching could find what I sold at far lower prices. But people were happy to buy from me.

At SendGrid a number of years ago (way pre-ipo), our top plan before custom pricing was about $80/mo. A large customer was integrating with us and their usage fit for $80/mo to start. Client told us we needed to at least add a zero on that otherwise it was too little to seek approval and the project would likely not proceed. We upped the price, secured the client, and last I heard, they were paying tens of thousands per month after fully ramping up.

Its definately a loosing battle. sigh

Is there a name for this? I notice myself have the same thought process often ("what's the catch?"). It seems to be some psychological force that complicates simple supply and demand economics.

Losing, not loosing

*losing