June 23, 2019
How much should I charge if I can save the client $10,000,000?
Sent by Jonathan Stark on June 24th, 2019
A savvy reader sent in this juicy question over the weekend (name withheld by request, edited lightly for clarity):
Heyo JS, Here’s an interesting one for you: logically, if I can save you $10k right now and I charge $1k, you probably won’t bat an eye at paying it. But… something I’ve been running into lately is this: the larger the first number gets, the more people balk at paying the commensurately-higher second number. If I can save you $10,000,000 and I charge you $1,000,000, you’re more likely to shjt a brick than to pay it. What’s going on here? Logic says there’s no difference, but we both know logic doesn’t come into pricing and money as often as we’d like it to. Thanks!
I have three takes on this situation:
- Claiming that you could save someone $10M is probably harder to believe than that you could save them $10K. So, it could be a credibility issue. You could mitigate this by offering some kind of guarantee to make your claim more credible.
- The buyer’s perception of your costs can be a factor. Some buyers just can’t accept a deal where the seller is profiting way WAY more than they are. In other words, if your investment in the engagement is limited to something like tweaking a few settings in their AWS account, some buyers are going to balk at paying you $1M for it. They’ll perceive your ROI to be in the range of 1000x while their return is only 10x. These profit margins are too far out of equilibrium, ala The Ultimatum Game. To mitigate this, take steps to get the margins roughly in equilibrium for you and the buyer - i.e., either lower your price or increase the buyer’s perception of your costs.
- There might be a question about how much your participation contributes to the $10M savings. Are you going to do everything on your own and the client doesn’t have to lift a finger to realize the savings? Or are you (just) going to draw them a map and they have to make the journey on their own? To deal with this issues, get as clear and explicit as possible about your percentage contribution to the goal and then adjust your prices accordingly.
Fun question!
Yours,
—J