Within the first few months of our business, I had an important early adopter on the sales hook, and adding such a marquee client to our portfolio would have been a big win for our young company. It was time to close the deal.
I wrote the scope of work, got clarity with the client on deliverables, outlined the timeframe, and included what I thought was a reasonable price cost. Then I handed the draft document to my co-founder for his input, whose tech team would be responsible for executing the custom data analysis.
We sat together as he read it through the scope, and we nodded our heads together in agreement all the way until the bottom line of what I thought was a reasonable price, judging from my 10 plus years in the industry.
At that point, my co-founder (and primary driver for the executed project) handed the draft proposal back to me and said, "I am literally not working for that amount of money. Our team isn't, either."
Hmm. This was a problem. Without him, and without them, there is no way that this project would ever see the light of day.
"So... What would it take?" I asked.
"Triple that amount," he said, "and then I think we'll be in business."
I blinked. Then I gulped. Then I multiplied the number on the bottom line by three, took a deep breath, and clicked Send to submit the revised version off to the potential client.
You can probably guess what happened next. The client didn't even blink at the cost. We signed the contract, and we were off and running. That client has become a repeat client and one of the most vocal advocates of our work.
Knowing One's Value
I cringe, even now, when I think back to this incident, partly because of how severely I low-balled the value of this project and partly because of how anxiously I waited to hear the client's response.
For all of the adrenaline of selling to that early client, and for how certain I was that our work could help that client's business, I still undervalued the contract. Before I could correct course permanently, in order to be sure this never happens again, I needed to assess why this happened and why the discrepancy was so wide between my initial bottom line and the bottom line that the client agreed to pay.
Here are three considerations, that can function as guidelines for entrepreneurs when you are trying to hit the moving target of pricing accurately.
Cross Winds Blowing in Different Directions
I grew up in the wine business as a journalist, which is not exactly known as the most lucrative job in the industry. The work of my team, however, functioned as a technology project. The market value of those two operations is significantly different, and I ought to have considered that more carefully in my initial assessment of that marquee project.
Our sweet spot, in hindsight? In between the two extremes, more heavily weighed on the value of the technology.
Early Adopter Pricing Shouldn't Mean Huge Discounts
Certainly, early adopters are valuable clients. They can help you hone your offering, and they can be a reference customer that will help to facilitate future sales. For that feedback and support they deserve to be rewarded with preferential pricing.
That said, it's also important that you gauge your costs. How many hours of labor are involved? How much data will need to be procured? What are the licensing costs, and the server and cloud storage costs? It all adds up, so do the math. Calculate your costs for worst case scenario, then add your margin on top of that.
Gauge What Your Industry Will Bear
What our startup does is unique in our industry, so there isn't a lot of frame of reference points in terms of pricing the projects. Which means there are a lot of positioning questions, like whether funding for the project comes from marketing or operations, and whether the project is a one-time engagement, or on a subscription basis.
Assessing the value of the project to the client, however, tends to get closest to an accurately priced offering, particularly when we can demonstrate the amount of money saved, or additional revenue earned, in relation to the cost.
Accurately pricing a new product or service, especially when your business is fresh out of the gate, is a tricky part of every startup's lifecycle. Understanding the dynamic and correcting a mistake quickly is also part of the process, even if that correction happens before the client even sees the proposal.