There’s a cost to being a pain in the ass (PITA). Whether we are on the cost generation side or cost bearing side, we all know this. A lot of businesses, however, don’t explicitly work these costs into their business model. By not doing so they implicitly create a system where their good customers (Low PITA factor) subsidize their bad ones (High PITA factor). This is *exactly* the wrong result you want from a pricing strategy.
In the system I have used for years, the base PITA value is 1 (one). When you start with me or with my company, your PITA factor is 1, which means that when we quote you, we do so on a purely traditional cost basis. The following example shows that with a PITA of 1, there is no change to keeping or dropping the PITA factor from the calculation.
Input Cost *( Mark-up * PITA) = Selling Price
becomes
Input * (Mark-up * 1) = Selling Price
becomes
Input * Mark-up = Selling Price
So, by increasing the PITA factor we increase the selling price. If PITA=2, then we get the following.
Input Cost * Mark-up * PITA = Selling Price
becomes
Input * Mark-up * 2 = Selling Price
becomes
Input * Mark-up = 2*Selling Price
The customer now gets a price twice as high as they would if they were less finicky, less pushy, required less handholding, or any number of other reasons that would drop their PITA factor. Likewise, if PITA=0.5, the customer’s price drops in half. Obviously these are extreme examples, and my typical PITA factor swings between 0.9 and 1.2.
On thing that becomes apparent here is that (At least in my case…) customers get penalized more for bad behavior than they are credited for good behavior. Why is this so? Well, to be a bit snarky about it, because we can. To be more precise in the answer, there is a lower limit to the price we can offer a customer and still make money. On the other hand, there is no theoretical limit to how much we can charge. To make another extreme example, the price that a US company will sell a military component to a British company is many, many multiples less that the cost of the same component sold to Kim Jung Il, whose PITA factor include legal risk, payment risk, sovereign risk, and get-kidnapped-and-held-in-a-North-Korean-prison-camp risk.
Nothing in the idea of a PITA factor is new or revolutionary, but I have seen very few companies that make it an explicit part of their pricing activity. One reason is that it’s hard to explain to a customer that you can’t lower your price any more because they are a pain in the ass. You can and should, however, explain to them that with certain modifications to the business relationship, price reductions could indeed be possible. This forces both you and the customer to evaluate where the costs lie and it changes an implicitly unfair and ineffecient system into one where you make the relationships more explicit, and then use that additional information to drive sales and pricing activity.
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