Pricing Market Problems
The Pragmatic Institute framework activity of the month is Market Problems. If you know about Pragmatic Institute you know that the foundation of all that we teach is understanding and then solving market problems.
At first glance, it appears that pricing is directly related to the size of the problem solved. Some life or death medicines sell for thousands of dollars a dose. It’s a no brainer that we would pay that much if it would save the life of a loved one. On the other hand, most of us would never pay thousands of dollars for something with much less impact. Think about a medicine that heals cuts quicker.
This is even easier to understand when thinking about B2B opportunities. If you build a product that will save a customer $10M, companies would pay a lot for it. Compare that to a product that will save them $100K. Obviously the customer would pay a lot more for the product that will save them more.
So far so good. The bigger the problem solved, the more a customer is willing to pay. However, it’s not really that simple.
This situation changes when competition enters the picture. The most a buyer would pay to solve a problem doesn’t really change, but what does change is how much they HAVE to pay.
As an example, assume a buyer would pay $1,000 to a monopolist to solve a problem. Obviously both the buyer and the seller are happy, otherwise they wouldn’t have entered into the agreement. Then, one day a new competitor enters the market and solves the same problem for only $200. Now, the customer would no longer pay $1,000. Assuming the competitor really does the solve the problem, the most the buyer would now pay is $200.
In high technology we see this frequently, where a company creates a new solution, is successful in the market, and then competition enters and drives down industry prices. Another example is in the pharmaceutical industry. Drugs are often protected by patents, making the manufacturer a monopolist, but the moment the patent expires competitors enter the market and prices decrease.
To summarize the point of the blog, the most a buyer would pay is the smallest of these two prices:
The amount they would pay to make the pain of the problem go away.
The price of a competitive product that solves the problem equally well.
So yes, the more severe the problem, the more buyers would pay to solve it. But the price we can get away with charging is often tempered by competitive offerings.
Photo by Tomasz Stasiuk
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