Friday, 9.27pm
Sheffield, U.K.
A coward dies a thousand times before his death, but the valiant taste of death but once. It seems to me most strange that men should fear, seeing that death, a necessary end, will come when it will come. – William Shakespeare
What is it that links economics, negotiation and freedom?
Well, let’s start with a little situation.
You run a software company and provide SAAS services to a number of customers.
You’ve recently been bought by a larger firm. What do you think is the first thing you should do?
The answer is: raise prices.
Why?
It all comes down to an economic principle called elasticity.
This is not as hard as it sounds if you keep the numbers simple.
Imagine that there are 12 people in the world who will buy what you have at the right price.
If you gave it away for free, all 12 would buy it. That’s the green 12 on the top chart.
If you charged $12, then no one would buy it.
These numbers give you a line on a chart, going from a cost of $12 for no customers to a cost of 0 for 12 customers – the blue line on the top chart.
So, what price should you charge to make the most money?
If you look at the middle of the chart, selling your product at $6 would result in six customers for a total income of $36.
If you charge more than that by, for example, raising the price to $7 then 5 customers will buy giving you $36.
If you dropped the price to $4, then 8 customers would buy giving you $32.
Anything you do to raise the price above or below that sweet spot in the middle will make you less money, as the second chart shows.
Still here?
Ok, so what this means for most people is that when you start, you price your product low.
And the easiest way to make more money is to raise prices which is what the experts will tell you because they know that when you raise prices the extra money you make will make up for the customers who leave you as long as your pricing is below that sweet spot.
That’s an easy way to get a quick win for the company that bought you. A tripling of income inside a year.
Now, how do you raise prices?
Well, you’ve got a SAAS product. The customers don’t own a single line of your code. They either pay more or lose the ability to do whatever you enabled them to do.
You’ve got a gun pointed at them and you aren’t afraid to use it now that you understand the power of pricing.
Now, let’s switch things around.
You aren’t really the SAAS provider with the power and the gun.
You’re the poor fool stood opposite looking at that nasty grey gun.
What is it you should do?
That choice you have to give in to the person opposite you will be made entirely on how much you care about what happens next.
Are you ready to walk away.
Do you care less than the other guy about what happens as a result?
Because here’s the thing.
Even if you had a good relationship with the guy opposite and consider him a friend you need to be ready to do what needs to be done when he demands you give in.
It really comes down to fear.
Fear – the lack of courage – is what will get you down.
Fear is what will make you give in.
That’s one reason why if you really have something important to do you need to have control over it.
Maybe you get that control by doing it yourself.
But whenever you deal with anyone else always be ready to walk away no matter what the consequences.
Because that’s the only way you’ll keep your freedom in the face of tyranny or a hostile negotiator.
Because nothing will be as bad as giving in.
Cheers,
Karthik Suresh
Handcrafted insight 