Know Your Value: Capture Opportunities And Manage Uncertainty In The New Year

The new year is a blank sheet of paper. Time for new goals, renewed ambitions, and more wins. People are making new health and lifestyle goals. Professionals are updating career plans and objectives. Companies and entrepreneurs are excited about opportunities – new and old – that writes the next chapter of their company’s history. Everyone has an opportunist mindset. 

This optimism, unlike past years, is confronted by uncertainty and volatility in the economy and political environment as a whole. This has real consequences for companies big and small, and presents a real opportunity for companies build solid foundations to thrive in all conditions.

Navigating Uncertainty

Some investors are taking proactive steps to prepare their portfolio companies for a potential ‘winter’. For some this means preparing founders for a reality where the next round of funding – or injection of capital – will be harder to come by, or worse, not available.

“There’s a large cohort of founders who haven’t seen a down economy
and  that’s a risk to the ecosystem”

– David Frankel, Managing Partner Founders Collective

For others – including several companies we have spoken to – it means strengthening the bones of the company; greater focus on financial and operational fundamentals and practices to help thrive across market conditions. This means greater focus on managing things they can influence; going from guessing to certainty. At the top of most companies’ list is capital requirements and cost management.

Companies are looking to fund-raise sooner and for more while capital remains available and the cost of capital remains low. This also means a renewed focus on managing costs including a smarter use of existing capital resources, more efficient internal processes, more effective product development, more selective hiring/recruiting decisions.  

Another core element to the sustainability strategy is pricing and monetization. As much as companies focus on what goes out (e.g. costs), there is not equal time or effort spent working on and improving what comes in (e.g. revenue, profit). Knowing – not assuming or guessing – how to monetize and price products and services help to make better decisions on a core function of the company – how it makes money. 

The Power of Your Price

Taking the guess work out of pricing and monetization, reduces the opportunity costs of time and lost revenue and profits, and increases focus on the activities that have impact and avoids the things that don’t. 

Working on pricing is often overlooked, but is a proactive approach to build the company’s capabilities to compete and grow. Even the slightest of pricing improvements can take your company further than most imagine. In fact, impact on the bottom line is up to 3 to 6 times greater on a 1% top-line price improvement than increasing volume by 1%. Compared to a 1% decrease in variable costs, a price improvement can have more than 50% better impact to the bottom line.

Design An Inside-Out Pricing Approach

For a great chef designing a world-class restaurant, the first step isn’t to build the dish. Chefs design dishes around the vision and goals for the restaurant. They create menus and offerings that drive this vision. They work to win customer segment tastes and interests. Building effective pricing follows a similar inside-out approach. The focus is on answering key internal questions before getting to external presentation. That first step starts with strategy. 

1. Define your strategy

The definition of strategy is the high-level plan to achieve one or more goals under conditions of uncertainty. We share this often but the starting point is identifying what goals pricing is intended to achieve. Does the company need to increase revenue and profitability? Does the company need to accelerate market share capture? Being clear and upfront of what you are designing your pricing for can make a huge impact on outcomes. 

Reality is your company can’t do everything – most companies can’t – so prioritization and focus are vital. Much like you see in an idea funnel, the first step to developing an effective pricing strategy is creating constraints on the problem set. 

Companies can also take the strategy building exercise even further by assessing resources to invest to work on pricing – money, people, time – and define goal timelines. At minimum, defining the strategy and its goals is a vital first step.

2. Identify how you’ll monetize

Once you have defined what pricing needs to achieve, the next step is to identify how you will charge for your product or service or the revenue model. 

Discovering how we want to charge becomes as important than what we charge. Take for example a simple freemium pricing model. A portion of the product is offered for free, and customers who want more features or functions need to upgrade to a paid subscription of $5 per month or $60 per year. This could compare to charging customers a single one-time fee of $60 without a free component. Both can achieve the same revenue per customer for the year, but depending on the model used, can have consequences on longer-term revenue and profit opportunity, customer acquisition cost and retention, price perception, and so on. 

Figuring out how to charge is not as simple as selecting a model. The best companies understand that to design the right model to charge, you have to understand your customer – who they are, what makes them uniquely your customers, and what they are willing to pay. Structured research and analysis is a vital step to successfully determining the right monetization approach for the company. 

3. Set your prices

Most companies start here, but yes this is the last, not the first step, in the process. Too many companies and entrepreneurs we speak to start and end here, without recognizing what prices you charge are a result of your pricing strategy + monetization plan. 

There are three main ways to price your product or service:  

  • Cost+: Calculating the costs associated with developing and distributing the product or service, and adding an arbitrary percentage margin. 
  • Competitor-based: Perhaps most common for companies and entrepreneurs, this approach is to research either direct or related competitors and their prices, and making pricing decisions based on competition.  
  • Value-based: Highly research and testing driven, this approach enables companies to not only price based on willingness to pay, but can build products and marketing around customers and the things they most value and need. 

But this is not all…

4. Execute

For many companies this step is the go-to-market strategy. In the pricing world, a great pricing strategy goes hand-in-hand with execution. The marketing and sales efforts is ultimately designed to reduce – if not eliminate – friction in the minds of customers when they ask “is it worth it (for this price)?”. 

To begin executing on the pricing work you’ve completed, companies to start looking at: 

  • Leadership: The company’s leaders set the tone of how pricing is designed and executed in the company.
  • Process: The clear steps and internal owners to manage the review, changes and implementation of pricing decisions.
  • Rules: Rules provide accountability and remove ambiguity on company’s pricing, and also sets restrictions on price changes such as discounting. These rules set a powerful tone on how the company will go to market and how success will be measured. 

Much like the monetization step, research is a key success factor to setting prices. This requires identifying the right methodologies, work, and discipline, but will take the guess work out of the company’s pricing decisions today and in the future.  

Final Thoughts

Building a strong foundation and removing decisions based on guesses help to prepare for uncertainty and proactive seize opportunities. Working on pricing is one powerful way to be proactive.

Pricing helps companies to answer important questions vital to the commercial viability and success of the company. This is important not only from a top-line perspective, but also for the company’s efficiency and effectiveness in any market conditions. 

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