Black boxes often lead to bigger profits

I must confess – after selling, or running a company selling, quasi-commodity products and billing professional services by the hour, I’ve become very jealous of investment bankers and software companies. Why? The pricing power of the black box.

What’s a black box? It’s a technical term for a device, system, product or service which is viewed primarily in terms of its input and output characteristics and whose inner components, logic or processes are not available for inspection. [1] Think about it – as long as you can pay, almost no one quibbles about:

• The investment bankers’ fee in an IPO [2]
• The price of the software which solves a problem stalling your company’s growth
• The price of the miracle drugs holding your cancer at bay

As a buyer, the best defense against black box pricing is direct head-to-head competition by multiple vendors offering essentially the same product or service or based on a pre-defined request for quotations. But this only works if there are multiple providers of the same or similar products or services.

But as a seller, you want to avoid such pricing comparisons whenever possible by:

• Creating unique products or services
• Pricing based on value delivered not costs
• Becoming the pre-imminent specialist in your business or industry

Black box pricing is not easy to develop, but the return in improved profit margins is usually worth the effort.

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[1] Paraphrased from Wikipedia.
[2] Initial public offering