Build Your Financial Independence Strategy Map (Part 2)

Direction map

TL:DR

  • Achieving financial independence is going to be a core competency and competitive advantage in the coming decade.
  • Startups need to design the map they will use to achieve the financial independence right for their company and objectives. 
  • Working on the core components of financial independence empower startups with greater maneuverability to build stronger businesses and increase their attractiveness to investors and stakeholders. 

In our last post, we discussed the rise of financial independence as an important theme we will hear more about in the coming decade.  Startups are increasingly assessed (and scrutized) as more than a center of innovation, but as a business capable of delivering disruptive innovation and technology. 

That does not mean startups and founders have to go it alone. 

In the second part of our financial indepedence series, we share a guide on the core components to building a financial independence strategy , and how to start making decisions to help you achieve this critical competitive advantage. 

 

Navigate Your Strategy With A Map

For most startups, going it alone isn’t as easy as Prince Harry (who had a tidy trust fund to fall back on) or Princess Meghan (who was an established and capable actress who had her own career prior to joining the royal family). 

Creating a financial independence strategy requires a thorough assessment to form a plan forward. To help the process we outline four important components of financial independence to assess and work towards. 

 

1. Define the strategic intent 

Financial independence – if achieved – is liberating and empowering, but the question leadership teams should be asking is why does your company need and want it? 

There are many reasons why a company strategically chooses financial independence, including controlling how the company will grow and monetize, whether to take external capital (and need to take more again in the future), or set the company up to quickly seize future opportunities. It is vital to understand how the company will look in 2, 5, and 10 years into the future and how this strategy will materially impact the company. 

The other part to this assessment is about execution – to define what it takes – time and resources – to achieve a financial independence strategy. Are there skills, people, product development, capital, or other resources that are required? How will the company acquire what it needs? What are blocks within the company to commit to this strategy?

These are hard questions that require more than soul-searching but a rigorous assessment of known information to drive a conclusion. The goal is not creating absolute certainty of the future, but to envision the pathway to the future your company wants to create.  

 

2. Rigorously design and test the business model

At the core of the financial independence strategy is a defendable and sustainable business model. One of the top 10 reasons for startup failure is a product without a business model. This is a risky way to build a company, and one that takes the company further away from financial independence. 

In our experience, the best business models are rigorously designed and tested. This means creating hypotheses about what business models are relevant to the company’s value proposition and objectives. This is followed by an iterative process of testing, refining and testing again. 

Ideally this process starts from the very beginning, but for companies that are a year or more into existence, tend to use the business model they started with – often adopted from another “comparable” company – and do not work on this. 

No company is “stuck” to their business model, especially if it does not get them onto a path that will lead them to financial independence. What is crucial is that the business model is built around the value delivered to customers and is aimed towards financial independence. Companies can be creative, and draw from outside their traditional industry, as long as they design the model right for their company, product, and customers. 

 

3. (Re)gain pricing power

One of the challenges to a successful financial independence strategy is the loss of pricing power. As value is given away through poor pricing, companies need to offset the per unit revenue loss with increased volume or customer acquisition. This is a challenging (and costly) calculus to manage when pursuing financial independence. 

Companies that are often best positioned for financial independence are those that have strong price management. This includes now the billion-dollar public company Atlassian to designer water bottle brand S’well (with more than $200M in sales), to mainstream companies such as Apple and Netflix. 

Gaining pricing power is not only vital for any financial independence strategy, but creates a unique competitive advantage to do more with pricing to win new markets and customer segments. 

Pricing power is not just the output (price level), but is the pricing strategy and pricing design created to extract the right monetary value, for the right customers. This is a process that market leading companies are constantly working on to master, and one startups can start on right now. 

 

4. Leadership driven, stakeholder supported

Any pursuit of financial independence starts with the leadership team. It can be a leadership team of one or many, but there needs alignment on why a financial independence strategy is necessary and the steps to get there. 

The importance of leadership goes beyond strategy and philosophy, but also in decision-making. Companies are faced with trade-offs, where decisions must be made on deals or opportunities that can impact the pathway to financial independence. A disciplined and aligned leadership team is better positioned to navigate these situations than those where there is fragmented and compromises lead to further complexity. 

In addition to leadership, is the support from other company stakeholders which include team members, investors and advisors. Pursuing financial independence can change the way the company does business, makes decisions, and the results achieved. Having the entire team rallied around the strategic intent is critical. Having the conversation early and often is required. 

 

Final Thoughts

One important theme that will rise in the new decade is the need for financial independence, and the action (or inaction) companies take to adopt and achieve this strategy. 

Growth at all costs is no longer the only way to build companies and create markets. Instead more fundamentally strong companies focused on financial independence are on the rise. This trend will continue as scrutiny increases on companies to not only build incredible products, but to build busiensses that support the development of more products well into the future. 

To ensure companies are better prepared, it is vital that they receive the right support to develop right building blocks.  Like building a company, financial independence is a process, but one that can empower companies and founders to realize the vision they set out to build for years to come. 

 

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The Theme We Will Talk About In The New Decade (Part 1)

theme financial indepedence

TL:DR

  • Growth without pathways to financial sustainability are no longer tenable (and tolerated).
  • Startups need to work towards designing achievable business models that support greater financial independence.
  • Greater financial independence will give entrepreneurs longer horizons and maneuverability to build stronger companies.

 

Earlier this year, Prince Harry and Princess Meghan announced they were “stepping back” from the royal family. One of their reasons is because they wanted to secure their own financial independence. Across the covers of pop culture publications and UK news outlets, the decision (and the subsequent happenings) shook the world. 

They were not only distancing themselves from public money subsidized roles they had as royals, but wanted to create flexibility and dictate their own path forward which includes where they live, what they work on, who they are accountable for, and how they spend their time. 

For the prince and princess, they wanted to decide their destiny and they knew the pathway to achieving this was securing financial independence. 

 

Shifting Tides

Increasing uncertainty and scrutiny was a theme we highlighted at the start of last year, and throughout the year, we saw increasingly greater scrutiny of startups, their business models, and the rationale justifying their financial viability. 

We had “untouchables” like WeWork get to the brink of an IPO only to find itself withdraw its bid to go public, get devalued, and layout staff. Less extreme events include companies such as Postmates pull back from IPO plans, and a slew of other startups who delayed potential scrutiny of their businesses.

 

Pressure from public markets

Companies such as Casper – which was losing $342 per mattress sold – went public but at third of their private market valuation. 

Other unicorns from Peloton and Slack, have not fared much better as public companies. Part of the reason is new pressure about their financial performance, and defensibility of their business model they otherwise did not face as private companies. 

Yet the challenge to even get to this stage (IPO) these days is unicorn status ($1 billion private market valuation or more). This creates an odd paradigm. To reach the level needed to go public, requires the capital and growth of a unicorn, but the type of business needed to reach that status may not be able to sustain the scrutiny of non-private investors and stakeholders. 

This creates a direct challenge to the defensibility of the business from the value proposition to its business model.

 

Stress on business models

The pressure is not only on companies on the brink of an IPO. The start of this new year has seen even more companies finding themselves re-evaluating themselves as a business, and starting with cost-cutting to ease some of the financial burden of their business model and go-to-market strategy. 

Unicorns such as Bird began reorganizing themselves. They laid off staff and pulled out of markets to rationalize their business operations. Bird competitor Lime also did their own round of cost cutting by laying off 14% of staff and pulling out of 12 markets.

But this business rationalization is not limited to scooter companies. 23andMe, Playful Studio, Oyo and countless more unicorns are also going down this path.

Simply put, many companies have been defending the capital they currently have because of uncertainty to access more capital in the private markets, but fundamentally their businesses are not built to make enough money to sustain itself. So these companies need to make the capital they do have go further than originally planned, and find ways for their business economics to work better for them in the short and long term. 

Marketing expenses are increasingly getting unsustainable. Take Unicorn a scooter startup founded by Tile founder Nick Evans, who had to close down his company due to unsustainable acquisition costs. Evans states,  “Unfortunately, the cost of the ads were just too expensive to build a sustainable business.” They not only closed the company, but did not have the capital to fulfill the 350 orders they did receive from customers for their scooters. 

Popularity shouldn’t be confused for viability. And a core component of viability is, at minimum, a reason to believe there is pathway to financial independence and build a company that is building a business, not just a product. 

 

Positioning For The Future: Financial Independence

With ever increasing visibility and scrutiny on startups, a growing theme we will hear is the need for, and decisions-made to help companies achieve financial independence. 

Does this mean financial independence means profitability? Eventually. 

Financial independence is a process and mindset, as much as an outcome. Being on a pathway to achieve financial independence is a function of the systems and processes created and put in place, led by a disciplined leadership team. 

There is an intentional-ness to financial independence, because it is a goal for leadership teams to work towards. Pursuing financial independence also has significant implications on how the business operates including: 

  • How the business will make money;
  • Expectations on growth (trajectory and speed); and 
  • Resource requirements to scale. 

Ultimately, financial independence means companies have created a business model and path where it can still materially grow and create markets, but also achieve its own profits. 

Financial independence enables companies to have a wider array of strategic and tactical options today and into the future. This includes the resources available to invest in the team, new business and product opportunities, and partnerships. This also involves the capital and investment that must be raised and secured. 

In the end, when a company pursues financial independence they are looking to create scalable revenue and profitability engines that decrease the need to seek outside capital, and the expectations that come from external stakeholders. 

It is important to note that financial independence and seeking external capital or investment can coexist. One example where both can be achieved is 1Password, a cloud-based password management platform. 

1Password pursued financial independence since the very beginning. They built a self-sustaining business that was profitable, and remained profit for more than a decade. 1Password had 1 million users, and 50,000 customers paying for their enterprise solution (Enterprise Password Manager) including 25% of the Fortune 100. 

They built an impressive track record, and after 14 years since its founding, 1Password decided to take outside investment ($200M). The decision was strategic and intentional – to help pursue specific growth programs and objectives.

Financial independence is not going to be top of mind for everyone. As stated earlier, this strategy is created and led from the top. This is true for young companies and mature growth companies alike. 

 

What’s Next?

Achieving financial independence will be a core competency of startups in the new decade. Startups will be expected to demonstrate their business acumen more than they have in the last decade. For external stakeholders such as investors, startups building financial independence capabilities today will not only help increase growth efficiency, but will create a stronger portfolio of companies. 

Where do we go from here? 

To help companies evaluate what financial independence means for them, our next article will outline the core components to build a financial independence strategy map and how to navigate the process. 

Is your company on the road to financial independence? How does your company think about financial independence? Let us know what you think! 

 

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Why Startups Need To Focus On Pricing More Than They Think

startups pricing deals

TL:DR

  • Your pricing is your startup’s hidden weapon to growth. 
  • Pricing enhances sales outcomes (read: revenue and profit). 
  • Your pricing will impact all parts of your startup from fundraising to finance, sales and marketing to development, so it’s vital to get this right now. 

Startups are increasingly under pressure to be not only product innovators, but to be sustainable businesses that can one day reach its profit potential. Yet many startups fall short of their potential because they have not focused time on their pricing – the critical component to their business model and sales. 

This has created a disconnect with how startups market to customers, what customers to market to, what elements of the product drive willingness-to-pay (or not), and how their pricing strategy will set their business on the right financial trajectory to help raise external capital to turbo-charge growth. 

Here are five reasons why startups need to focus more on pricing. 

 

Pricing power gives you added market power, which makes you desirable to investors, and makes your company more valuable. 

You created a product customers love. Through pilots, tests and real-life customers you have concluded you have product-market-fit, right? 

Yes, in part. The other part to this critical equation is whether you have willingness-to-pay for the product you’ve created, which is too often the missing component to the product-market-fit equation. By determining not only willingness-to-pay, but more importantly the pricing needed to establish and grow willingness-to-pay, you’ve enhanced your desirability for investors because not only have you checked off the product innovation and scale boxes, but you’ve also checked off the critical “can this be an actual business?” box. 

 

Pricing enables your business to improve cash flow, and it costs less to do than through traditional volume-based activities 

Pricing plays a critical part to accelerating revenue traction and trajectory, yet too many startups under-utilize this growth lever. Your ability to design and execute better pricing, will not only improve cash flow at little to no cost, but will improve the growth potential of volume-driven sales activities where so much of your startups growth capital is going towards. Put another way, with better pricing – model and level – you can get more for each hard earned sale and customer won. This helps improve cash flow because you were able to price better, in addition to capital and time spent winning customers.   

 

Knowing your product’s willingness-to-pay is a direct indicator of what customers care about, and ways to your product better to enhance customer demand. 

There is no greater source of product validation than when customer wants to pay for your product to have the product in their lives. This is critical for a startup that wants to build a viable business. Building a product without understanding willingness-to-pay, is a huge risk not only for monetization but also the development of the product. 

Focusing on pricing, means you know your customer better helping gain an edge on competitors.

Truth is most competitors don’t work on pricing. This means there is a vital insight missing when they invest in marketing and sales. Knowing your customers across all dimensions – including willingness-to-pay – helps you to engage, active and retain customers better giving you an advantage most competitors won’t utilize. 

There is such a thing as bad sales, and it usually includes poor pricing 

No sale is closed without a price (even when free). So when you win a hard earned sale (and for early stage startups, a potentially expensive sale), poor pricing means you’ve left money on the table for no reason than because you didn’t know it was there. For many sales is a volume/unit discussion, and that can get expensive very quickly. By balancing sales efforts with a focusing on pricing, you’ll get more mileage out of each sale – and this is eveb before any work is done “optimizing” pricing. 

 

5 Practical Steps Your Company Can Take Today

1. Weekly price reviews early on

Yes there is a lot for a startup to do in a week, but pricing must be one of the top activities and its starts with ensuring pricing is on your weekly agenda. These weekly reviews is more than understanding what are current prices. These weekly reviews are an opportunity to get all key people on the team together, aligned on the same strategy. This is also an opportunity to let everyone’s opinions to be heard. 

Pricing is a common bond between the different functional groups – finance, sales, marketing, product – so when anything changes in the pricing world, it affects all groups. These reviews not only identify friction points and conflicting views, but is an opportunity to create solutions. 

 

2. Create a pricing informational data bank  Make pricing the source of customer and market data ingestion.

Pricing is a process not an output. This means pricing needs to ingest, assess, and make decisions on information. Creating an information data bank collects data and insights from all teams from senior leaders to sales and marketing. The information data bank also documents information on how pricing decisions are made and why. 

This allows the team to know who was involved, what the thinking was at the time the decision was made, and what information was used to form the decision. This is not for audit purposes, but is also an evolving record for new team members to quickly decipher the company’s pricing philosophy and to identify ways to enhance pricing.  

 

3. Celebrate small wins – Pricing is iterative 

A startup’s pricing will change numerous times during its first few years. This can be due to changes in the product and range, competitive pressures, internal decision making, etc. What this means is pricing is evolutionary, rather than static; a truth the best and most disruptive companies understand. This makes it all the more important to recognize even the “small” pricing wins. 

This can be the increased revenue from a new pricing model launched for a specific customer sub-segment. It can be improved customer retention through the discount program for highly loyal customers. What is important to celebrate the efforts made to improve the company’s growth using pricing. 

 

4. Celebrate consistency and price discipline 

For many startups, the question of pricing quantitative and about what models to use. What is underestimated is the discipline required to extract the real benefits of great pricing. This is ensuring pricing reviews don’t happen once every three years. This means process-driven decision-making. This means defending your pricing because you know it’s aligned to willingness-to-pay. 

One of the hardest parts of pricing isn’t the modeling, but it’s the work and psychological hurdles startup executives face when having to make a pricing decision. The best models can say needs to be x or y, but it’s the leader that must decide, execute, and manage that decision. 

 

5. Encourage pricing creativity

A common question is “what is pricing “best practice” within an industry?” There are industry trends in terms of the types of models and levels used. But startups aren’t in the business of being like everyone else – they are in the business of solving problems that others are not addressing. This philosophy extends through to the startup’s pricing. 

Whether desired or not, a startup’s pricing is part of the brand and identity. So encourage the team to think of creative solutions to how the company can and should price. The one caveat is any business case that is made for new pricing ideas are backed by research and testing. 

 

Final Thoughts

All startups understand they need to price – especially when they are trying to make a sale and accelerate revenue. What can get overlooked is the need to focus on pricing, and the impact it has on all facets of the business – from raising capital to marketing and branding. So it’s vital to start on the work of pricing and making pricing literacy a core competency of your startup. 

Start by learning what you need to know to form the best pricing decisions – strategic and tactical. Start by aligning the team around a unified pricing strategy. Start by integrating pricing during the weekly standups. Taking these first steps will help you get on your way to improving how to think more strategically on the pricing process and objectives; ultimately driving the most impactful decisions.

 

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Create A New Competitive Moat

Peter Thiel famously said, “Competition is for losers”. 

He may be right, but that doesn’t mean competition does not exist. 

If your business is going after a market with many new and existing competitors – and chances are you are – then you can not easily ignore competition. 

At the heart of any competition strategy, is the goal to create or acquire advantages – ideally substantial – over your competitors. These are yours moats – the protective layer that keeps competitors out of your home and away from your customers. 

For many companies, there are a number of ways to create a competitive advantage. We look at three common and often pursued forms of competitive advantage – technological, operational, and supplier. 

 

The Technology Moat

Businesses that has a technological advantage, creates technology innovation (e.g. proprietary technology, patents) that is either difficult for competitors to acquire or re-create. 

It can include technology such as the recommendation engines of Netflix or Spotify, or the formula for a new drug of a pharmaceutical company. Not disconnected to the innovation, is also the product quality. This advantage requires resources (e.g. capital) to acquire, but can have a long-lasting payoff and competitor moat. 

The Operations Moat

A second competitor advantage companies try to acquire is an operational advantage. That operational advantage is focused on decreasing the cost of producing and delivering goods or services, by increasing the effectiveness of elements in their operations. 

This can include how the supply chain is managed to the manufacturing/production process used to create and distribute product. This competitor advantage has helped companies such as clothing giant Zara, retail leader Wal-Mart, and even startups such as Warby Parker and Casper well. Acquiring this advantage also requires resources (e.g. capital) as well as expertise to design and execute. Done well, this advantage can improve a company’s cost positioning, reduce waste and increase pathways to profitability. 

The Branding Moat

A third competitor advantage some companies try to acquire is a branding advantage. This is commonly seen in consumer-facing companies, including clothing brands and retailers. The goal of the branding advantage is to extend beyond a transactional relationship with customers, but create an emotional connection and loyalty. This advantage can decrease costs of customer acquisition – for SaaS companies negative churn – increase the number and frequency of repeat purchases, increase total spend (revenue), and increase customer satisfaction and advocacy. Unlike other competitive advantages, creating a brand advantage is an earned advantage and can take more time to acquire and retain. Once achieved, brands can experience longer term benefit as seen by companies such as retailer Nordstrom, fashion brands such as AllBirds and Patagonia, and video game maker Nintendo. 

But these are not the only moat-creating advantages you can build for your business. Entrepreneurs also have pricing  

 

Make Pricing A True Competitive Advantage

Using price to create a competitive advantage is not a new. For many companies trying to make a dent in a new market, price is often deployed to shake up the market and put pressure on incumbent pricing. What this typically has meants lower – sometimes free – pricing. 

This pricing tactic can be highly disruptive and lucrative as companies such as Ikea, Walmart, and tech companies such as Zoom and Google have used low prices as a competitive advantage against legacy brands and companies. 

When looking at what made the pricing strategies of these companies successful is not just in going low, but how they defended their value even at lower prices and found pathways to new sustainable revenue channels and profitability. 

This is important, because for too many companies creating market disruption using low prices is used as a blunt instrument that leave them scrambling to find ways to monetize and defend their worth in the eyes of customers. Not only can this be a costly reality to maintain, but can also result in a pivot that is hard to recover. 

Pricing is multi-dimensional and can be deployed in many different ways. The key is in the rigor in planning and execution. 

From the years of working with companies at all stages of growth across the world, there are five core questions to consider when deciding how best to use pricing to create a competitive moat.  

 

#1: Do you know your monetizable value today?

This is obvious, but if you are using your pricing strategically, particularly through lower prices and discounts, then it is all the more important to know what the baseline willingness to pay for your product is. 

Many companies go low on price without considering what their true willingness to pay is and for what customer segments. This is giving away the farm without realizing perhaps all you really own is the chicken coop. Alterantively, if we want to be more strategic and tactical, we may not have to give away 50% of our customer’s willingness to pay, if we know 30% will due. Anyone who’s had to convince a customer to buy their product will know, each dollar is hard earned so if you don’t have to, don’t leave it on the table. 

 

#2: What is our value defense?

Whether you’re going high or going low, it is important to know how the pricing strategy will be defended. Too many times we have seen companies where the first and last line of defense is (low) pricing. 

As any sales professional will atest, you never start the discussion on price; the prospective customers will struggle to hear anything else. 

So what price drivers can and must you defend? Who are the value drivers meaningful for?

Pricing is a core inter-connected component of the value proposition and buyer decision, so it is vital to identify and defend those price drivers that shape a customer’s perception of your product. 

Consider a new car a customer is looking to buy. What does she consider?

  • Price? 
  • Performance? 
  • Safetey?
  • Financing?
  • Trust in the dealership?
  • Brand?
  • Asthetics such as car color?
  • Features such as the sound system?

What factors matter and the relative importance is important to understand what is defendable and what is given away. It is rarely all or nothing. 

That said, value is a lot like trust. It is very difficult to gain, but extremely easy to lose. 

 

#3: What are the success factors for our pricing strategy?

It is important not only to execute new pricing, but to understand what are the success factor of the strategy. This requires prepararation ahead of the pricing launch to understand what will be needed to manage successful execution. 

In the case of Walmart, their “Everyday low prices” strategy is more than a marketing slogan. The pricing strategy is enabled by a company that knows world-class supply chain and operational excellence is how that strategy will be delivered and sustained. 

When thinking about how you will use pricing to create a competitive advantage, consider what factors are required to make the strategy successful. 

 

#4: What alternative strategies can be deployed in the future? 

There are two parts to this – (1) as a result of today’s decisions, what opportunities or limitations are creaed; and (2) what other pricing models and approaches are potentially available. 

Pricing will evolve as fast as your company and it’s products. So it’s important to consider given the current state, what else can you do with your pricing in the future. 

This can be using more complex pricing methods such as dynamic pricing, but will also require the technical backend development and investment to successfully execute. 

It can be the development of a mix of pricing models, that will capture revenue and growth opportunities across different buyer groups and use cases. Rarely is the pricing decision an at the moment decision, and will require planning and more importantly research and analysis to support the decision with your team. 

 

#5: What organizational competencies are created?

We often think of pricing from an output perspective (e.g. a price, revenue, profit), but pricing – when done well – is a core competency that is hard to replicate, maintain and execute well. 

For all the technical and marketing prowess of companies such as Amazon and Apple, pricing remains a straetgic advantage. The advantage is not only for the price they execute and achieve, but the organizational capability to maintain discipline, and continuously maintain and evolve the pricing. It is hard, which is what sets the best companies apart. 

 

Final Thoughts

Pricing is an effective way businesses can create a competitive moat, but is too often designed and executed like a promotion rather than a strategic decision. 

The tradeoff for short-term customer acquisition, are the potential longer term consequences to the business including the dilution of price/willingness to pay, increasingly expensive customer acquisition costs,  and limited future pricing options. 

Thoughtful planning and design, early and often can mitigate future pricing and proposition challenges. This starts with establishing a willingness to pay baseline for targeted customer segments to craft how the competitive moat will be executed and sustained. 

Like any good strategy, maintenance and defense is required. This means we need to measure and modify regularly. If immediate value is given away (e.g. lower prices), then we need to ensure core value drivers are defended and we understand what tactical pricing options are available as the market and business changes.

Like a good cajun roux, if you stop stirring and take your eye off the pot, it will burn making the roux unusable. Avoid the pitfalls to make pricing a true competitive advantage and moat that will position your business strategically for the long-term. 

 

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HelloAdvisr CEO On The SparkXYZ Startup 2.0 Podcast

Startup 2.0 is a new video series by SparkXYZ that features leading venture capital firms and entrepreneurs covering a range of topics from raising capital to growth. In past episodes, the series included interviews from leading venture capital firms and organizations including Luma Launch, PLG Ventures, and TenOneTen Ventures. 

In their latest episode 6, they invited HelloAdvisr Founder and Managing Director Ed Lee to the podcast to discuss pricing and how founders can start to tackle pricing today.  

Watch the entire episode here.

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If you or your team is interested in having a hosted session on your pricing strategy and monetization model, please contact us: contact@helloadvisr.com

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Our New Pricing Survey Report: A Look At How Entrepreneurs And Startups Approach Pricing

HelloAdvisr Pricing Study Report Fall 2019

“How do entrepreneurs and startups approach pricing?”  

With the recent debate on startup growth and sustainability, the topic of pricing and business models is current and relevant. 

Business models and their viability are under increased scrutiny, and how businesses choose to price will directly feed those business models and the growth assumptions they’re driving. Even outside the headline grabbing companies, we know pricing and business models are direct contributors to success and failure. 

So how do entrepreneurs and startups approach this work? It is a question we are always asking, but could not find more structured insight on how entrepreneurs and startups approach pricing. To help broaden the this discussion around pricing, we decided to create our own and build a wider-context to the work of pricing by entrepreneurs and startups at all stages of growth. 

We looked at pricing on five different areas:  

  • Objectives; 
  • Pricing ownership within the company;
  • Process and systems;
  • Value exchange; and 
  • Role of competition.

Through our report, we want to help entrepreneurs to better understand what other companies are doing when it comes to pricing. More importantly, we want encourage entrepreneurs to take a critical look at how and why of pricing and inspire discussion on ways pricing can be improved in their businesses to support long-term success. 

So download your free copy of our report, and you’ll see how others approach pricing, and advice on ways to improve and capture more value through your pricing.   

 

Return of the P-Word

The headlines have been rough for growth startups in recent months (insert link about WeWork). 

It has been particularly challenging for growth startups and their investors looking to take their company public. For what were once the darlings of the investment, tech and media worlds, suddenly the music has started to slow, if not stopped (see Postmates). 

In some ways we’ve now reached a peak when you have a twitter battle between a prominent investor and a professor on the merits of these companies’ existence and prospects of survival. It turned ugly (or entertaining depending on your seats) when they started to make wagers online to show “skin in the game”.  

No, this post isn’t a takedown of VCs, WeWork, or any other VC-backed growth company. 

What is rising from these debates is something more subtle and important – a discussion about how businesses are grown and their pathway to profitability or the “P-word”. (Sorry, I know many were expecting me to say pricing, but we’ll get to that) 

Let’s go over how we got here and what to consider when thinking about the profitability question for your business. 

 

How Did We Get Here? 

A big part of the current debate has been around the strength of high-growth companies as a business. The concerns raised ranges from corporate governance, culture, business model and, yes, profitability (or any hope for profitability).

Many of these companies such as WeWork has through capital by investors with a “grow at all costs” strategy. Through this strategy many business fundamentals have fallen by the wayside. Greater scrutiny of how companies have developed as a commercial enterprise, beneath the veneer of technology, innovation or disruption – has been a deeper look into how, if ever, their business model will enable the company to ever make a profit. 

For anyone following how these high-growth startups that did make the leap in the public markets by IPOing has not fared as well as they did in the private markets led by venture capitalists. The price the public market is willing to pay has differed considerably to the private markets. The exception appearing to be those companies with lower profiles but are profitable. 

Despite all the bad rap many VCs and investors have been getting as of late, not all use the same strategies. Many are equal-parts about innovation, growth and basic business fundamentals. 

 

Why is Profitability Important? 

Profitability or at least the pathway to profitability asks some fundamental questions about the company. It looks at how the company is run, and will be run into the future. It’s not just about managing costs, but how equipped (and aware) the company is to capture and defend revenue growth opportunities. 

Pathway to profitability of course looks at price. Many of these companies operate in highly competitive markets with new competitors emerging. To combat this competitive environment, many entrepreneurs engage in unsound business practices such as price cuts and discounts to acquire customers. This possible because investors are willing to subsidize them and this strategy. Unfortunately, the reality is this is not a sustainable strategy to keep customers.

Evaluating the pathway to profitability raises fundamental questions about any business, and whether the business model actually works. It is is incredibly insightful into not only the current state but also where the company will go. That’s why the question around profitability is so helpful when evaluating a business and its leadership. 

 

Ways To Consider The Profitability Question Properly

Consideration #1: Remember, it is your choice, as the founder/entrepreneur, on how you want your business to grow. 

There are tradeoffs for any decision you make as a business leader. Being aware of how you want your business to grow will define the commercial strategy you pursue. This will define what pathway, if any, to profitability your company will or will not have. 

Those founders such as Katrina Lake of StitchFix, Eric Yuan of Zoom, Ethan Brown of Beyond Meat created innovative, high value companies that are profitable. 

For those who believe you can not achieve unicorn scale and be profitable look at the incumbent in WeWork’s market – IWG. It’s possible, but it takes leadership to steer the ship in that direction. 

If you are raising capital, this why the best investors always recommend founders to do as much due diligence on the investors they are seeking funding from. Everyone has their own definition of growth and success so understanding and making an informed decision is critical. 

All this requires asking yourself the hard questions. This is both empowering and frightening at the same time. Many entrepreneurs are stuck in a chicken or the egg game, where they need capital to launch or grow, but may want to grow more slow and steady. 

 

Consideration # 2: You need to build the right business model for a pathway to profitability.

There is no cutting corners on the building the right business model. It takes research and rigor to determine what model will best position your company for growth and profitability. 

One of the most common realization companies face early and often is most customers don’t want to buy their product.  This is usually a product of the data they are collecting, but more importantly the data they are not collecting. 

To make better decisions on the business model, this means collecting the right information about the right customers. You need to know what elements of your product is delivering the most value that customers are willing to pay for. You need to know what is not working in your business model, and what to build (or not) build to achieve the optimal value exchange (you give them your product, and they pay you for it). 

When you are not looking at the right customers, they are making you focus on the wrong things. So when you do invest in marketing or branding, you are making a decision on two unrelated things; which can be a costly exercise. 

 

Consideration # 3: Pricing matters.

When most founders think about profitability they look at two big metrics – revenue and cost. Except when they think about that revenue figure they only see one side – volume. 

It is often taken for granted that revenue is made up of volume AND price. This means there are two powerful levers companies can use to influence revenue and therefore your pathway to profitability. 

In a survey we conducted of more than 100 startups from pre-seed to growth stage (Series C and later), only 31% were highly confident their prices reflected their customer’s willingness to pay for their product. In the same survey, more than 45% stated they were unsure whether their customers are willing to pay more for their product. 

This is a lost opportunity for companies looking to build or accelerate their pathway to profitability. But it still remains one critical thing they can do today to change course. 

 

Consideration # 4: It’s harder (and more expensive) to create profitability using a model not designed for it.

The challenge to pivoting towards a profitability mindset is both structural and psychological. The structural challenge is that the team and the way of growing has increasingly been engrained in the way of working. Targets and incentives have been designed around this. 

When the goal has been to grow month-on-month 100%, but due to a shift in the business model or go-to-market strategy, growth “slows” to 70%. Is that bad? How does the team and stakeholders react? 

That’s when the psychological forces kick-in. As founder and CEO of Bird – the unicorn scooter startup – Travis VanderZanden says, “I’m an ex-growth guy, and sometimes it’s painful for me”. 

Profitability is slower and at times, feels like more work. It’s easier to find ways to fill all the seats in a restaurant, until you realize you made no profit and have no money to pay your suppliers and staff. In the long run, the work to install earlier components for profitability will pay off. 

 

Consideration # 5: Creating (and achieving) a pathway to profitability creates a buffer to any economic downturn.

It goes without saying that when your company makes money – profit – it will put you in an enviable position in the event the economy goes south and what was more plentiful capital starts to get harder to come by. 

More important, as an entrepreneur, you have the confidence in knowing you have a business model that can self-produce resources (read: money) needed to weather more difficult economic climate. 

 

Final Thoughts

I recognize that these views may be a less popular perspective. It asks hard questions about the company and the foundation on which it is built (or being built). 

Many of these questions have not been answered or attempted to be answered. 

But more and more companies are facing the reality that no profits or no reasonable pathway to profitability is a difficult proposition to sell. This is true for startups that have raised billions, as it does to the new startup looking for its first customers and investors. 

There is increasing scrutiny to not only the innovation and product you are creating, but scrutiny of ultimately what you are trying to build: a for-profit commercial company. 

Profitability does not mean stifling innovation and disruption. Profitability means living another day to disrupt through innovation. 

It can be a hard pill to swallow, even for the most innovative and well-capitalized companies such as Dyson. Famous for their vacuums and fans technologies, Dyson has been working on a fully-electric automobile and allocated more than $2 billion for development and production. Yet after building a team of more than 500 employees, Dyson has abandoned the plan because it was not ‘commercially viable’. No one would argue Dyson is not an innovator or disruptor. 

While not all components of the business is developed and mature, it does mean the entrepreneur is ultimately responsible for knowing (or getting to the point sooner rather than later) how to build a commercially successful business. 

As history has shown, pathway to profitability is one thing that rarely gets turned around in a good way – or without enormous pain – when the foundational pieces are not developed and managed. 

 

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Meet Event Hub: Reimagining Live Event Management

(Photo: Jamie Nassar, Co-founder and COO; Michael Bleau, Co-founder and CEO)

Last month HelloAdvisr ran a giveaway to help a startup showcase their company at TechDay Los Angeles – the largest one-day startup event in Los Angeles. 

One of our winners is Event Hub, a live event management platform looking to offer event organizers with a smarter and more powerful way to manage and execute events.  Event Hub was also a past participant of the Techstars Anywhere accelerator program. We had a chance to hear from Michael Bleau, Co-founder and CEO of Event Hub to share a glimpse into this amazing company and team! 

 

Let’s start from the beginning. How did it all start? What was the inspiration for your startup?

My co-founder Jamie Nassar and I spent several years managing brand sponsorships at live events all over the country, from marathon expos to food and beverage festivals, music festivals to parades, and everything in-between. We also spent three years as the organizer for a large charity festival. The combined experiences from both sides of the event organizer and sponsor relationship led us to realize a huge market need for a platform that could solve two major challenges. Event Hub offers a smarter way for sponsors, exhibitors, and vendors to match with the right event opportunities, and provides event organizers with a toolset built from the ground up to streamline the applications, payments, paperwork, and communication that make up an event’s relationship with their non-attendee participants.

 

What are you most proud of as a company? What sets you apart?

We are extremely proud and excited about being the first of our kind, while providing immense value to our loyal and fast-growing customer base. We set ourselves apart by homing in on the sponsorship challenge for organizers of consumer events, versus other event software companies that either serve niche verticals or focus primarily on attendee ticketing. We have built a platform capable of realizing the multi-billion-dollar opportunity that is the consumer event software industry, with software that makes event operations exponentially more efficient, giving organizers more bandwidth to close new sponsorship deals that our marketplace helps to create. Even more exciting is that we already have the data proving our model works, as our marketplace is successfully creating a network effect and driving increased sponsorship revenue across our customers’ events.

 

What are you trying to achieve at this year’s TechDay LA?

As a recent graduate of Techstars Anywhere 2019, the Event Hub team is excited to put our learnings into practice and rapidly scale up our operations. Growing our network within the Los Angeles startup community by meeting the right potential future investors and top local talent is paramount to achieving our ambition to quickly grow into a live event industry powerhouse.

 

What’s next for your company?

We are closing in fast on our 100th customer organization. Our customers, such as the Conqur Endurance Group (Los Angeles Marathon), California Wine Festival and Jive Live Entertainment in-town, combine to produce more than 300 events across the US and Canada, while our marketplace is populated by more than 10,000 sponsors, exhibitors and vendors. We are also hard at work on solidifying key partnerships with select established industry players, and event production companies with national portfolios that we hope to announce in the near future.

 

Last question! From the lessons learned and successes won, what is one piece of advice you can share with aspiring founders and entrepreneurs about building a startup?

I would say that as you get excited about bringing your idea to life, your focus and communication will be major keys to success. As a dreamer betting on themselves against the odds, you need to be able to focus on the one or two things that you should be prioritizing most, versus all of the directions you could go in. Once you understand what to focus on, communicating that plan to your team will be critical for execution.

 

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If you or your team is interested in learning more about rethinking how your company can grow, visit our blog for a range of articles from pricing to sales effectiveness or contact us to schedule a chat: contact@helloadvisr.com

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Meet Meowtel: The Sitter Trusted By Cat Lovers

(Photo: Sonya Petcavich, Founder and CEO)

Last month HelloAdvisr ran a giveaway to help a startup showcase their company at TechDay Los Angeles – the largest one-day startup event in Los Angeles. 

One of our winners is Meowtel, the #1 cat-sitting platform in the U.S.  Meotwel is a recent graduate of Jason Calacanis’s LAUNCH Program, and we are excited to hear from Sonya Petcavich, founder and CEO, to learn more about this amazing company and team! 

 

Let’s start from the beginning. How did it all start? What was the inspiration for your startup?

My childhood cat, Miss Lily. She was frequently left alone when I worked in a corporate sales role and when she passed in her older age, I felt a lot of remorse for the lack of quality care I provided to her. Cats have been historically very underserved so I wanted to change that.

 

What are you most proud of as a company? What sets you apart?

Our crazy cat-centricity. Spreadsheets of cat puns. Sharing cat client stories within our sitter community. It’s everyone’s passion for felines that keeps us tightly knit together.

 

What are you trying to achieve at this year’s TechDay LA?

Continue to build awareness in our largest market and to meet investors who understand the cat problem.

 

What’s next for your company?

Closing our seed round, scaling like crazy, and taking over the cat world.

 

Last question! From the lessons learned and successes won, what is one piece of advice you can share with aspiring founders and entrepreneurs about building a startup?

Be patient – it’s a long journey. As long as you give each day your best effort, do your best to normalize the high highs and low lows so you can end up winning this marathon.

Hungry For More?

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If you or your team is interested in learning more about rethinking how your company can grow, visit our blog for a range of articles from pricing to sales effectiveness or contact us to schedule a chat: contact@helloadvisr.com

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Fundamentals Of A Winning Business Model

At the core of every successful company is a strong business model.  

Your business model is the blueprint for how your business will make money (or not). But for many companies starting out, not enough time or effort is put into identifying the right business model for their business.

This can turn out to be a very costly mistake.

In a study by CB Insights on the top reasons why startups fail, a top ten reason (coming in at #7) is going to market with a product without a business model. 

It doesn’t have to be this way.

Designing the right business model for your company, product and goals are very much in your control. From our experience working with fast-growing startups to global corporations, we cover core elements to building a successful business model.  

 

What Is A Business Model?

Let’s level set by making sure we understand what a business model is, and is not.

According to John Elkington and Richard Johnson, “business models are what connects technology potential with real market needs and consumer demand”.

Another definition from management theorist Peter Drucker is that a business model is “assumptions about what a company gets paid for”. 

So there are two vital parts to understanding what a business model means for your business:

  • A connection between your product or services and the needs of your customer and market; and
  • A structure that defines your customer’s willingness to pay.

This is important because to build the right business model it will depend on how much we know about our customer, market, value proposition, prices, and financial requirements and resources.  

This requires information – the right information – to help us assess and inform the right business model for our company.

No small task, but all work within your control.

 

Why Your Business Model Is Critical To Your Company’s Success

Entrepreneurs and businesses understand that they need a business model, but too many do not understand what makes a good business model for their business.

A good business model answers core questions about how your business will operate, as well as the viability prospects of the company. A great business model creates a competitive advantage embraced by customers and differentiated to the competition.

Given the high stakes, your business model should not be left to guesswork and chance.  

 

Create and deliver value: How you bridge the gap between your solution and customers

Why your customers need a new product – more specifically your product – is not always obvious. This is especially relevant for new technologies and innovations.

Your business model is the bridge between the solution your company offers, and the needs and willingness to pay of customers. It is how customers make sense of your value proposition and the pathway to acquiring the proposed solution. 

 

Financial viability: How your company makes money

At the core of any business model is how a company intends to make money and profit from its products. The quality of the business model for a company and its product reflect whether enough money will be generated (read: profits) to achieve viability.

The business model also reflects how well the company understands its customer and market, to make a commercial enterprise capable of generating revenue and eventual profits. If the business model isn’t right, this can wreak havoc on the financial viability of your company.

 

Strategy: How your company wins customers and the competition

Too many companies – big and small – have a tendency for a ‘follow-the- leader’ mindset when selecting a business model. This can be an actual market leader with a commanding market lead and is setting perceptions on the value and prices.

Then there is the perceived market leader, where within an industry – often in nascent or technology-driven industries – there are companies competing with one another despite the vast majority of prospective customers don’t know the company let alone the value proposition or pricing competitors.

What this means is there is business model complacency that occur for many companies, leaving potential profits on the table, but also a missed opportunity to differentiate from competition. By creating business models that are like everyone else, there is greater pressure to justify the value proposition and the pricing question of “is it worth it?” – a tall order for many startups and new ventures.

 

Key Components Of A Business Model

Like pricing, a good business model doesn’t start by simply selecting between a menu of models. No, a good business model starts by understanding your customers for your product created by your company. A great business model is designed for the company, it’s customers, and the goals the company aims to achieve.

 

Your value proposition   

Developing an effective business model requires a clear identification of the value proposition and how you can differentiate yourself in an often-times crowded market.

As Peter Drucker famously says, ”Customers don’t buy products, they buy the benefits that these products and their suppliers offer to them.”

We often take for granted what our product actually does for our customers, leading to business models built on assumptions. Companies that are attempting to disrupt an industry, are particularly prone to this because they hold the belief that the disruption itself is the benefit.

Yet human nature is often resistant to change if not rejects change outright in favor of the familiar. That’s why when you go to the purchase page of some software companies you see a long list of features and benefits – a list made for everyone, and thereby for no one.

 

Your customer

The process of defining the value proposition and the benefit your product aims to deliver, the next question is, “who is the benefit for?”.

In our project experience working with companies from high-growth startups to large market leaders, the question of who is actually the company’s customer is commonly overlooked.

We take a tiered approach to the customer question that is based on the degree of connectedness the customer segment has with your product.

Imagine a series of concentric circles – like the rings of a tree trunk – where each circle gets smaller as you get closer to the center. While in aggregate, all the circles combined represent your desired market, it is those circles closest to the center that care most about your product and ideally, your brand and company.

Defining who those customers are, what they value most and the benefits they need to derive – whether through your product or a different solution – is critical. This enables you to create a business model aligned to your customer; not someone else’s customer.

 

Your pricing

The best companies are pricing experts because one of the most important parts of your business model is the pricing strategy.

An effective pricing strategy maximizes revenue and demonstrates that you really understand how your customers value your offering. The amount of resources dedicated to developing a pricing strategy also reflects how much time a company has spent trying to extract value out of its products. This involves monetizing different aspects of the product to serve the largest possible audience.

More advanced pricing strategies may use tools such as targeted discounts or promotions to increase revenue, and the use of other pricing design tactics. A good pricing strategy that captures the value out of your offering increases the odds that your business will be sustainable in the long run.

 

Your goals and resources

Creating a business model for your customer and company means self-discovery by your company of what it wants and needs to achieve. This can be to maximize revenue. It can be to penetrate the market and win market share. Creating a proxy for success steers how the business model is designed but also make changes as needed.

Creating a good business model also needs to account for resources needed to achieve your defined success. This may mean to make changes on how your company sources materials or talent, how your company acquires customers or shifting the business model.

When companies adopt a business model of market leader or look-a-like company, many input and output assumptions are made often to the detriment of the company. Rather than methodically evaluating inside on what is and is not available, attempts are made to fit their square (the company) into a circle (competitor’s business model).

 

Building The Right Business Model For Your Company

The types of business models available to you depend on the results of your work on the different components outlined above. This means a great deal more time spent on research and discovery as it is on selecting from a menu.

Even businesses that look similar at first glance could have dramatically different business models. Consider video game developers such as Electronic Arts and Epic Games. Electronic Arts have a traditional gaming business model and charge $60 per game up front. Epic Games uses a “freemium” model where games such as “Fortnite” are free to download and gamers then pay for in-game upgrades.

This has proven to be an effective strategy as Fortnite earned $300 million in April 2018, almost six times the first-month sales of EA’s highly anticipated Star Wars Battlefront II. Epic Games’ business model requires the company to engage customers over an extended period of time but Electronic Arts just need to make that first sale. Their respective business models don’t exist in a vacuum and are designed to achieve commercial objectives

It is also important to be mindful of potential pitfalls when building a business model. If the price is wrong, the analysis that follows will be fundamentally flawed. Targeting the wrong customers means that the business model will emphasize the wrong product attributes. Every assumption in a business model needs to be checked and rechecked.

 

Final Thoughts

A company’s business model is a key success factor in both the short- and long-term.

A good business model identifies the core customer, their pain points, and how specific products or services can address those issues. The best and most disruptive companies create not only amazing products but a business model that connect paying customers to their solution.

But success comes not only through the ultimate model these companies chose, but the fact that the model was uniquely their own, for their product and customers.

Business models might serve as a blueprint for a company’s future but those plans aren’t static. Business models evolve over time as companies better understand their customers, the value of their offerings, and their competitive positioning. Evolution doesn’t necessarily mean a complete overhaul. It is a commitment to making actionable adjustments (e.g. pricing, product offering) that meet the needs of the market for now and beyond.

 

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If you or your team is interested in learning more about rethinking how your company can grow, visit our blog for a range of articles from pricing to sales effectiveness or contact us to schedule a chat: contact@helloadvisr.com

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