Spoiler: Because you can spend dramatically more on Sales and Marketing
As I explored in the previous post – very frequently your price is only a very small aspect of the total cost to your customer. For many IT solution is can be as little as 10%. Therefore a increase in your price may not make a noticeable effect on your customer’s cost and therefore the Law of Demand may have a negligible effect in reducing demand for your product, however it can have a dramatic positive impact on your business.
Startup AAA is selling a product for €10,000 and makes 5 sales a month. Startup AAA has a sales and marketing budget of €3,000 for each sale – so they can spend €15,000 a month on acquiring new customers. Startup AAA’s price is 20% of the total cost of ownership for the customer.
If Startup AAA increase their price by a modest 20% to €12,000. This only increases the total cost to the customer by 4% (since price is only 20% of the cost). While unlikely, this small increase in cost may impact on minorly on demand, however the impact of this extra funds has on sales and marketing can be dramatic. In this example the amount spent on sales and marketing can be as much doubled to €6,000 per sale. With the additional resources that this spend allows, sales and marketing should easily be able to increase the total volume of sales.
So price increases disproportionately positively affect your sales and marketing budget (or alternatively profit) while disproportionately minimally impacts on the total cost for your customer.
It should go without saying that price increases like this only apply if your competitive advantage is not price, but then again if you are a startup competing on price then you’ve got bigger problems.