When I meet with a new company, I start by asking the same two questions: What does your company make? What makes it different?
It takes a nano-second for the eyes of the entrepreneur or executive to light up in excitement. They talk about the product idea and inspiration. Walk through the cool features and functions their teams developed (or in-development). Then comes the big finish, the x-factor – why no one else is doing it and why this will disrupt the market. The enthusiasm is infectious. When presented right, you feel like they discovered fire.
Then I start asking the “money questions” – How much are you charging? Why will customers buy and use your product? Who are your customers? The response often comes in a little slower and less assured.
It is here when the customer insight gap appear. The insights collected are insufficient to make pricing and go-to-market decisions. To compensate, competitor data plays an out-sized role to make these critical decisions. This begs the question, do competitors know more about your customers than you?
Competition is important, but…
Competition is absolutely important and should not be underestimated. Where it becomes counterintuitive is when a company believes (a) the product is market defining; (b) the product is better than competition; and (c) customers will get immense value in using the product.
If either is true, then why are competitors playing such a prominent role in pricing decisions influencing your customers?
This is not how market leaders and makers approach pricing.
Apple recently announced HomePod, their new speaker and smart assistant hub. HomePod is a direct competitor to market leader Amazon’s Echo and challenger Google’s Home.
The price for Apple’s latest hardware? $349. That’s 90% more expensive than the Echo ($180) and 170% more expensive than the Home ($129).
Apple has historically positioned its products as upscale and premium. To justify HomePod’s positioning, Apple spoke to the customer. More specifically their target customer segments. The HomePod is designed for the music lover. It’s for customers who appreciate a premium listening experience and technological innovation. It’s for customers who love to have a piece of luxury design occupy a visible space in the home.
This isn’t branding, this is customer insight in action. Apple knows the customer they want to win and is going straight for them. They do not allow competitors to dictate their prices. Instead, Apple uses price as a differentiator.
Why some companies let competitors influence the value of their innovation
I understand not every company is Apple (yet). But all companies have three key tools to help win the market: product, price and marketing communication.
Conceding price from the beginning is a risky strategy. Often price concessions dilute product differentiation and growth opportunities. It is a growth strategy many companies have trouble pivoting from. So why do companies lean on competitors to determine their prices? Here are three factors I’ve seen drive this risky strategy.
Built-in market validation (with a pinch of fear)
It’s hard enough convincing your family and friends your product is a winner and worth paying for. Harder still with total strangers. When competitors are already in the market doing even half of what you’re doing, then there is access to pricing validation. If the price started from gut feel, even better there’s “data”.
Is this “right” for the company? Most likely not. The trade-off for the perceived ease and validation of competitor pricing is avoiding the necessary customer insight work needed by growth companies. It’s accepted as ‘good enough’ to move on.
Bridging the gap of incomplete and imperfect information is the value of comparables. It is a common tool used by investors to determine company valuations. Unfortunately, the risk that often bears out is the comparable is too superficial and not accounting material differences that influence outcomes.
Companies using competitor pricing as the market price run similar risks. The most obvious are creating perceptions the product is comparable thereby diluting the innovation and inherent value. The larger risk is missing the preferences and behaviors unique to your customers.
There is also the understandable fear of ‘going it alone’. For entrepreneurs, most moments of their company’s existence is a risk. I can empathize the risk aversion. Unfortunately, that doesn’t mean the right customer insight shouldn’t be collected and used.
Not asking pricing focused questions when gathering customer insight
Too often the customer insight is insufficient. What this means is relevant pricing questions are not asked. This is dangerous. These questions are critical for three reasons.
- First, these questions help inform the baseline perception about your product. Asking the right questions inform gaps to address via product, marketing or sales. It’s a lot easier influencing customer behavior when you know what they think about your product.
- Second, the right questions inform the relative value of your product. This can include competitor alternatives, specific features, and use cases. What is important is gauging influences on customer behavior and decision-making.
- Finally, this process builds into the company’s research DNA commercially-minded questions. It’s a different way of communicating with customers and sometimes a harder one. The goal is not to collect opinion, but understand the behavior of your customers.
This lack of insight decreases confidence to make a decision. Too often the insight is at a population and not target cohorts. What results is some blended pricing using competitor prices and costs.
Belief prices can change in the future
Like other parts of the business, some entrepreneurs believe that prices can be updated in the future so accept prices that ‘work’ now. As some prominent entrepreneurs suggest, get it out to the market and hear what the market tells you.
Unfortunately, pricing is one of those things that is less forgiving. Even when customers are willing to give a second chance, there is often no basis to believe the company is capable of the necessary correction.
One recent example is the highly competitive food delivery space where companies such as Sprig and Munchery competed for the dining table. There is an increasing downward pressure on what e-food companies prices led by increased dependence on promotions and discounting to win customers. This leads to a danger cycle which becomes very expensive and difficult to sustain.
Technology and operational fine-tuning provide opportunities to scale. As a ceiling is reached (read: cost savings), the unit economics makes even less sense as the customer’s willingness to pay was far lower than most of these companies could afford to offer. In the case of Munchery which was losing up to $5 million in a single month and recently closed Sprig was losing up to $350k per month.
When pricing receives too little attention too late in a company’s go-to-market, corrections are difficult. In addition to a misread of customer’s willingness to pay, these food companies were conditioning price perception with each new deal or promotion.
Hindsight is 20:20, but one has to wonder how much revenue and profit growth could have been achieved with a pricing strategy built on customer insight and value.
Get the insight you need
Entrepreneurs and companies can be proactive in gathering customers insight and take greater control of their pricing destiny.
While time is a key ingredient to customer research, some quick wins are achievable. Here are 5 things that can be done today.
1. Set goals: Know what you don’t know and fill in the blanks
Before asking a single question, define what insight is needed to push the product and company forward. The questions you develop based on these goals will give more impactful insights
2. Define early customer segments, refine and repeat
Sounds obvious right? Surprisingly many companies struggle defining who their customers are. Companies need to get specific or at least who they want their customers to be.
This is iterative so don’t expect the perfect customer profile the first go around. The goal is to peel away layers to get to the heart of what makes one customer group unique from another.
3. Build behavior questions, not opinion questions
A pricing truism I often share with clients and in talks: pricing is always important. It’s more valuable to determine what other factors are important and the relative value of those factors versus price.
Like an anthropologist, you are looking for behavioral cues. Focusing on behavior questions shed light on what customers value, how decisions are made and the inputs needed to form that decision.
4. Use every customer interaction as an insight opportunity
When entrepreneurs and companies hear ‘research’ they often imagine long projects resulting in a bulky report collecting dust. Customer research shouldn’t be avoided but practiced by the entire company.
Gathering responses from even a small cohort of customers can be powerful. These interactions shed light on what is valued, friction points in adoption and refine the proposition. Don’t miss these opportunities customers give you.
5. Link insights to go-to-market actionable activities
Insight gathering may seem like an end in itself. It’s not. You’re collecting insight so that it’s actionable. That means the things you learn from and about customers should serve how prices are set and communicated.
Insights should inform how marketing and sales campaigns are designed and measured. If you’re collecting customer insight that is not actionable, then stop. The goal is to reduce the number of steps to get from question to action.
Going out and learning what you don’t know about customers can be scary and intimidating. Not doing so is riskier. Don’t dilute the value of your product even before you give yourself a chance to learn about your customers.
If you have a product (or building one) that is better for customers, then embrace the difference by not giving it away. Find what makes your customers unique and what drives them.
Don’t concede your pricing power without knowing what that pricing power is. If you accept competitor prices are right for your product, then eventually your customers will too. This is a losing and unsustainable position to be in.
If you bet on a ‘change it later’ strategy and not get the insights you need, you’re effectively mortgaging your pricing power. Don’t give up before seizing the opportunity to learn and win customers, which will pay dividends in the short- and long-term.
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