I was talking to an entrepreneur-friend recently about product pricing for business products, and the fact that there’s a dead zone between the $1000 and $5000 price range that most successful products avoid. That dead zone exists for a reason and it’s important to avoid it, as I will explain here.
For most businesses – even large ones – a purchase under a $1000 can typically be made by a first-level manager and even by a staffer. In some cases, they put it on a corporate credit card and in others they use a discretionary budget, but when the user wants your product, the sale is usually pretty quick and simple.
In contrast, a sale of $1000 or more often requires a mid-to-senior level manager’s approval, a signature from purchasing and even a formal purchase order and invoice. In some cases, I’ve even seen $1000 plus sales rise to the VP level for approval, so this can become heck of a hurdle to clear to close a sale.
As a result of these restrictions, it makes sense to stay below $1000 if possible. But, why might your product need to be priced at $5000-plus instead of, say, $1500? The answer is the sales person. Over the $1000 price range, you not only have more hurdles to clear before closing a sale, you often have to use a one-on-one selling approach to close the deal, which requires a sales person. This sales person earns a small salary, makes commissions, generates expenses and only closes a portion of their leads, so suddenly a $1000 sale becomes very unprofitable.
It turns out that, in most cases, a sale through a salesperson is not profitable until the price reaches over $5000. Hence, the dead zone between $1000 and $5000.
So, if your business product or service is priced in the dead zone, there are things you can do about it.
- If possible, move your product below the dead zone. Find a way to lower the price just below the $1000 threshold, break the purchase up in to multiple payments across multiple months, or sell a service-based subscription that generates monthly revenue.
- If going lower is not possible, rise above it. Consider ways to bundle your product with others so that you can charge more and justify a salesperson, sell maintenance or support along with the product, or sell your product to someone else who can bundle it.
- Stay in the zone. While this is the least appealing option, this option can work. Instead of using an outside salesperson, consider online ad campaigns with inside sales representatives at lower costs. Or, consider a multi-tiered marketing approach that allows for slack labor (college students, work-at-homes) to sell your product. Or, a viable option for a small business may be to sell the product yourself. (Hey, I already said it wasn’t very appealing).
Interestingly, a dead zone exists to some degree for consumer products and services just as it does for business products, though the zone for consumer products is a good deal lower and it doesn’t appear to be quite so “dead” – it’s probably between $100 and ending at $500. It may be coincidental, but $100 is about the point at which I start running purchases by my wife and she runs purchases by me. Hmmhh.
Donald Patti is a Principal Consultant with Cedar Point Consulting, a management consulting practice based in the Washington, DC area, where he assists organizations in applying Lean and Agile to develop new products and services as well as improve organizational performance.and small business strategy. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.