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Why The Margin Matters Not

Price setting is a complex issue with very basic steps.

For a start, the PRICE cannot be lower than the COST or higher than the VALUE of what you are selling.**

The difference between your price and the cost is called the MARGIN, or incentive to sell. The difference between the value and the price is the incentive to buy.**

Now, if you are at least vaguely familiar with the business speak, you would have heard a lot of talk about the margin, and what to do and not do with it. In my work, I tend to wholesale ignore it, and I got a lot of questions about that, so let me be clear:

Nothing is more dangerous in business than a correct answer to the wrong question. If you base your pricing decision on covering your costs and finding a satisfying margin you could come under the dangerous illusion you solved the issue. You didn’t, because the margin only tells you if it’s a good idea to sell this offer, but tells you nothing about whether it’s a good idea to buy it from the client’s side.

This is why I rarely ever mention the “incentive to sell” (margin): it’s the easy part. Since expert service providers usually sell things that have simple cost structures, COST is relatively objective and easy to measure, but the same cannot be said about VALUE. 

That makes figuring out the “incentive to buy” the real problem in pricing, and the margin is barely worth mentioning in this context.

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