As consumers we’re constantly surrounded by pricing. Pricing when grocery shopping. Promotional signs in the store window. The latest email offer. With all the prices we see, it’s natural to build a comfort level with pricing and the purchase decision process. After all, we’re asked to compare offers, make tradeoffs and assess whether the price is ‘worth it’. Then why do entrepreneurs struggle with pricing?
We attribute this disconnect to misconceptions of how prices are set and managed. What we see time and again, is this perception that pricing from the entrepreneur’s consumer experience can be translated over to the commercial side of their business. The unintended consequence is the product’s value is under-marketed and -sold, and ultimately monetization and growth opportunities are missed.
Here are 3 common pricing misconceptions we come across working with entrepreneurs and companies.
Pricing is a benchmarking exercise
This is one of the most common misconceptions of pricing. There is a perception that prices are set and managed by benchmarking; if you know what others are charging then you know what to charge.
The problem is the thinking is counterintuitive. If your company is selling something – a product or service – that is ‘disruptive’ or better than the rest, then why do you allow the competitors you’re ‘better’ than to set how much you monetize?
In a conversation with one startup founder building a consumer service platform who explained they ‘mastered’ pricing because their company was ab/le to automate the benchmarking exercise with his primary competitors. There were three questions raised by this method:
- Are the benchmarks ‘correct’? It was assumed the competitors he was benchmarking actually had the ‘right’ price compared his service. What he collected was what he believed were ‘market’ prices, but customers were still unfamiliar with the product, so much about the customer, offer and lifetime value is unknown.
- Are the company goals the same as benchmarks? The goals he was trying to achieve differed from what the other, more established, competitors were aiming to do. He wanted to be premium versus competition and wasn’t interested in capturing a disproportionate segment of the market. This contrasted greatly with his market share-minded competitors.
- Are the company’s products the same as benchmarks? He listed no fewer than 8 reasons why he believed, and states his customers agree, his service was superior to competition. Why then would he price his service or base his entire monetization model exactly the same as these ‘competitors’?
It would be a shame for so much value created in such a cool product be lost this early on, simply because the founder was going to follow what his competitors.
Pricing is just a number
Entrepreneurs often view pricing through their consumer experience and perception. The number paid for a cup of coffee, streaming video service or gym membership. Many companies and brands have been very good at giving a sense of price stability and predictability, so when a price change goes wrong, customers let the company hear it.
The problem, and where the misconception lies, is the belief that the objective of pricing is to solely get to a number and then ‘set it, and forget it’. The reality is pricing is more fluid than most entrepreneurs (and consumers) believe. The very best companies are actively managing prices as the value of the product changes.
One example is how Apple prices older generations of its iPhone or iPad. When they launch a new model, they recognize the value for their older generations are lower (also lowering demand) therefore lowers the price. In addition to older products, Apple is also differentiating newer models from a price perception perspective. They are ensuring the value gap with their newer products is sufficient and understandable for consumers.
What is key is matching consumer value to the prices set. This goes beyond just identifying a static number, but understanding both prospective and current customers on what drives their willingness to pay for your product (or not).
Pricing is easy
There is a beautiful imperfection to pricing that’s both rational and irrational. This doesn’t mean its ok to get pricing wrong. It certainly doesn’t mean pricing is easy.
One of the reasons why some companies are world-class, industry-defining or [insert your own description of awesomeness] is because these companies understand, among other things, pricing is not easy, but it’s important and to do it well it comes with work.
To be fair, for growing companies, nothing is easy. So much is learn as you go, including pricing. What is vital is recognize how much more complicated pricing becomes as the company grows. Not just the more technical components of setting prices, but also the execution and maintenance elements:
- Is the Marketing team clear about how they will communicate the product and changes in price? Benefits and value?
- Is Sales equipped to have difficult conversations to argue for higher/lower prices when speaking with prospective (and current customers)?
- Is a consistent message in place if customer service receive inquiries about pricing?
- Who on the team will monitoring pricing?
Like all things important to the company, pricing is not easy with many moving parts. The larger the company grows the bigger the challenge. Building not only the infrastructure to set prices, but components needed to monitor and maintain prices is not easy, but essential to win.
Pricing carries with it many misconceptions that start from our lives as consumers. Yet continuing on this path can be harmful to the value entrepreneurs are building each day in their company and product.
Short-term, monetization opportunities can be lost, revenue growth not fully realized and development of necessary management processes are slowed. Longer-term, coming back from pricing mistakes and corrections carries both a financial and growth liability as well as a reputational and brand cost with customers and the market.
Being proactive is key and starts with the business leaders of the company to recognize gaps, and develop not only the technical component, but the processes and culture to actively manage pricing as a key competitive tool.
Interested in learning more?
If you or your team is interested in having a hosted session on your pricing and monetization model, please contact us at: firstname.lastname@example.org