The Core Principle Good Companies Miss In Their Pricing Strategy

The most successful pricing strategies are rooted in the pursuit of understanding people.

This is the starting principle I always emphasize to companies, founders, and executives. If you treat pricing like a discovery process of people, not only will it open opportunities on how to design your prices, but how, when and to what groups of customers you should sell.

This isn’t easy. As anyone who’s built a successful relationship with another human being –personal or professional – can attest, this takes time, dedication and focus. Many leaders are hesitant and often not excited to invest time and resources to customer discovery. But the results, when done right, can be material and high-impact.

 

Know The Unknowns Of Your Customer

I met with a fast-growing social analytic platform with millions of users globally who wanted guidance on their pricing strategy for their newest product. Early in the assessment one of the first questions I had for the CEO/co-founder is to tell me who is their customer and why.

This question seemed to surprise the CEO, especially as his focus was about pricing. We continued along this line of questioning to discover that his customer was loosely enterprise customers, but what was still unknown is why these customers were right for his product, what value these customers would gain, and what pricing, sales and marketing is needed to win these customers. It was a difficult discussion, but necessary to identify the known unknowns and how much of the surface has been scratched.

Lack of specificity, like this social analytics company faced, is problematic for several reasons. Let’s look at three.

 

  1. Pricing: Without a clear idea of who the customer is, any pricing decision becomes increasing generalized. The best pricing is designed for willingness to pay, which varies from customer-to-customer or at least at sub-segment levels. The closer you move to generalized pricing, the more generalized the offering will become; losing opportunities to capture and defend your value.
  2. Product development: It is unclear what customer problem the company is looking to solve. Lack of understanding of the customer makes prioritizing certain development difficult; requiring the company to guess what features or functions their customers value most.
  3. Use of resources: Because this company didn’t know who they are making their product for—at least initially, building a sales process and the marketing assets needed to sell to the customer is challenging. Consequently the company will expend time and resources building untargeted assets and campaigns for vaguely defined customers.

 

Pricing is a supercharged force that drives revenue, profitability and customer acquisition when it resonates with the values of the right customers. With this in mind, before asking “should the price be lower or higher”, the question entrepreneurs and business leaders should start by asking “who is my customer?” and “what do they value most in my product or service and why?”

Industry-defining companies like Apple and Amazon are able to thrive because they are focused on building a customer-centric pricing process. To get to this level, you have to value understanding your customer with as much precision as you value getting to a price point.

So what steps can you and your company take to kick off the customer discovery process? Here’s some things to get started today:

 

1. Build: Compile key hypotheses around your customer

Go beyond demographics and dig deep. If you walked past a group of people on the street (or companies at a trade show), can you identify your customers?

Customer discovery is BOTH an internal and external activity for your team. At this stage, your team is compiling hypotheses about the customer and identifying which hypotheses your team must test and validate. Leave nothing on the table.

Make this stage an inclusive exercise. Collect input from any team or individual that must engage with customers – customer success to finance, sales to marketing. Each will have a unique perspective on what makes a customer, your customer.

What type of information should you collect from your team? To start, you want to understand the descriptives – who are they? Where are they located? What do they use?

You then what to compile assumptions your team is making on behavior, specifically around how customers assess and decide on what products and features to try, use and recommend. So this can include questions like: What parts of your product will customers value most? Why? What is the benefit derived? How do they assess the benefit? Is there a monetary value to that benefit?

The goal at this stage is to build a list of ‘operating knowns’ teams and individuals have been using to make decisions about and for customers. This means the answers to the questions your team builds is actionable.

One side result of this exercise is the identifying where misalignment within the company exists and to what extent. This is not the time to make corrections (yet) or to make judgments on any team. The goal is the bring the company into alignment to make pricing, sales and marketing decisions based on proof points, not assumptions, to defend those things matter most for your company.

Here are 10 questions your team can use to kick off the discovery process. You’ll not only create an initial description of who your customers are, but you’ll also find different perceptions – subtle and direct – within your own team.

  • What brands do your customer most associate with?
  • How would your customer use your product or service?
  • How would your customer assess and decide on whether or not to use your product (or something similar)?
  • What problem(s) would your product solve for your customer? What are the benefits?
  • Would your customer pay $1 to have the problem solved with your product? Why?
  • What would prevent your customers from adopting your product?
  • If they didn’t use your product, what else would they use?
  • How do your customers connect and communicate with new brands and companies?
  • What are your customers top three favorite existing companies? Why do they love them?
  • What companies do they not support? Why not?

 

2. Test: Validate what you believe is true about your customer

 After your team begins to fill in the blanks of what describes and drives your customer, now comes the fun part – test! It’s time for you and your team to validate which elements of the customer profile are true, what is missing, and what doesn’t align with your company’s objectives.

Here are 3 low-burn ways to start testing your hypotheses about your customer:

Go wide: Online surveys

Online surveys generally attract a broader audience than a focus group would, but is extremely useful in understanding a broader group of respondents

Online surveys are easier to design and launch, but because respondents will have a shorter attention span the questions asked must be precise and relevant to your test. Asking nice-to-know questions or launching surveys or 30+ questions will not only affect response rates, but also the quality of answer you receive.

Go deep: Focus groups

Focus groups provide a great opportunity to actualize who you imagine your customers are while collecting feedback. You’ll have an opportunity to not only ask pointed and detailed questions, but also observe reactions to questions and collect nuanced feedback.

The key to success with focus groups, is inviting the right cohort of participants through the screening process. Because the focus group will include a small number of participants – usually between 5- 10 people – you need to be talking to the right people, otherwise the results will not be actionable; wasting precious time and resources. Rely on the customer definition that you and your team decided on in the “define who your customers are” exercise.

Get out there: In-field testing

In-field testing provides the opportunity to learn about your customer based on location driven research such as in front of certain retail store, events or neighborhoods..

It’s important to note that the consumer data collected from this research strategy is time intensive and actionable insight is dependent on the quality of questions asked. This research strategy is advised when you’re looking for immediate results and directional insight that informs what to test next.

 

3. Assess and Actionable Decision making

Now that your team has tested core hypotheses about your customer, it is now time to translate the insight into action.

There is, unfortunately, no set formula on what items to prioritize first, but a good place to start is to focus on high impact items that move the needle on your company’s objectives.

Remember, the purpose of this customer research is not only to better understand who is your customer, but to better serve them by building products they value, design pricing – structure and level – that align to their willingness to pay, and go to market with sales and marketing activities that defend and excite the right customers about your product.

 

Final Thoughts

The steps outlined here allow for identifying and testing one of your single most important hypothesis: Does your product have the market fit with the customers you believe it does? And if so, what is driving value for your customer?

It is never too early to start this process, whether your company is just starting out or your company has reached a level of maturity. Customer discovery and the insights that come from the process, are critical inputs to make better decisions on how you’re going to market with your pricing, sales and marketing, but also how you’re allocating and using resources for product development.

Treat the process of learning and understanding your customer as an evolutionary process, because it will continually change. Your competitive advantage will come from the systematic process you build to proactively identify shifts and make high-impact decisions for your product and company.

 

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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 at:contact@helloadvisr.com 

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How To Use Pricing As A Growth Strategy

You’ve got a great product that your customers love, a growing reputation, and team members who are passionate about what they do — yet you’re struggling to grow. Why?

Most businesses in this position would knuckle down and work harder, confident that a breakthrough is just around the corner. And it might be. But what many of these businesses don’t realize is that that breakthrough could be made today (and with potentially a lot less effort).

So, what’s the secret?

It’s your pricing strategy.

Most businesses start by setting a price that they think is about right and then leaving it to see what happens. Normally, customers are happy to buy (because it’s a good product), and so the business assumes that the price is right. Once they’ve found something that “works,” businesses tend to stick with that price, only altering it as manufacturing costs go up.

This set-it-and-forget-it mentality leaves value on the table and restricts growth. Most businesses guilty of this strategy are setting their prices too low; they receive enough to continue running but not enough to grow.

Marc Andreesen Pricing Quote

The time to focus on your pricing is now: let’s get started.

 

Pricing As A Growth Strategy

Designing and executing a pricing driven growth strategy requires an “inside-out” approach. By starting with your company and your growth objectives, you can set out a sustainable strategy that delivers value to your customers without compromising your growth.

Step 1: Establish Your Goals

It appears obvious, but the first step is to look at your growth goals for your company. Where do you want your business to be in one year’s time? How about in five years?

Many companies forget what it means to build goals – stretch and attainable – that reflect the ambition and new reality for your company and market. Your pricing is a vital part of this growth story because it starts to identify the levers available, how hard you want to push these levers, and the impact these decisions will have in your company’s future state (e.g. can you become profitable?).

Step 2: What Do Your Customers Value?

Your customers purchase your products or services because they provide value. Perhaps your service saves them time or provides them with access to something they can’t get anywhere else. Whatever it is, you need to figure it out — because it’s this value (and its relationship to price) that decides whether they make a purchase decision or not.

Not sure why customers value your product? Ask them!

Step 3: Determining Worth

To price correctly, you need to put a number on the value you provide your customers. This value might change depending on which customers you look at — and this might have important implications for your sales and marketing strategy.

For example, say you provide an online service that saves users an average of four hours per month on a boring and monotonous task. How much is that worth? Executives might value that time at $250 per hour. Students, on the other hand, might value their time at a fraction of that. Understanding what customer value and what drives that value is critical to determining worth — while not giving up on potential monetary opportunities.

Step 4: Evaluate Your Market

The value your competitors offer (and the prices they offer it at) may shed light on which pricing strategy will work best for you. Some industries are very “flat” with little difference in pricing between firms, while in others there is a huge difference (like the motor industry).

Your task is to consider how your value measures up against your competitors and decide what that means for how much your customers are willing to pay.

Step 5: Align Pricing and Goals

Your aim is to hit the sweet spot — a price that reflects the value your customers receive and that they’re willing to pay, and that allows your company to hit its growth goals.

Sometimes this isn’t possible, in which case you either need to revise your growth goals, improve the value you provide (and potentially increase the amount customers are willing to pay) or both. What is important is not to put pricing or growth into silos, but see where pricing can enhance goal achievement.

Step 6: Test Your Price Design

Remember when we mentioned the “set-it-and-forget-it” mentality? You’re not going to make that mistake again.

Test your pricing strategy by running trials or conduct pricing research. This can be easily achieved online by driving traffic to a sales page and then splitting the traffic so that viewers receive the same sales message but different prices. Often, the most profitable price will result from fewer sales at a higher value — but you won’t know unless you test.

Step 7: Launch, Measure, Refine, Repeat

Once you’ve completed testing, launch your pricing strategy and measure its progress. Conduct regular reviews of your pricing strategy, taking into account customer opinion, sales progress and your growth goals. This is not the responsibility of a single team member, but a core leadership topic — pricing is a reflection of the value created for customers. In addition to refining your price design, you will enable your sales and marketing teams to better design ways to defend the pricing with stronger communication, messaging and processes.

 

Final Thoughts

Used correctly, your pricing strategy is an incredible tool for supporting and enabling the growth of your company — but you have to have a plan. By being clear about your goals and values, evaluating your market, and implementing thorough trials and testing, you can find the ideal price, keep your customers happy and grow your business.

 

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

Get our latest updates and insights by subscribing to our newsletter and following us on Facebook, Twitter and LinkedIn.

Accelerating LA’s Next Gen Of Startups: Bixel Exchange EIR Program

The Los Angeles startup community has been on a boom with the launch of many home-grown startups in a wide range of industries from consumer products (The Honest Company, Dollar Shave Club) to social media (Snap) to software and platform companies (Cornerstone OnDemand, TrueCar). The growth of the LA startup community and now LA as a strategic growth market for leading accelerators such as Techstars LA (HelloAdvisr CEO is a startup adviser) and 500 Startups as well as the rise of investment in local entrepreneurs, seeing a rise of more than 60% in VC investment in 2017. In addition to homegrown entrepreneur and startups, there has also been a rise of organizations helping to build and support the startup ecosystem, and one of the key organizations leading the charge is the Bixel Exchange.

Bixel Exchange is Los Angeles’ Center for Innovation and Technology and host at the Los Angeles Area Chamber of Commerce. Bixel Exchange’s mission is not only to empower entrepreneurs but to help translate entrepreneurial activities to a more prosperous and inclusive Los Angeles.

Through their Startup LAunch program, Bixel Exchange launched an Executive-In-Residence (EIR) pilot program. The startup accelerator program selected six high potential startups with seven tech executives in a 10-week intensive program for hands-on, customized mentoring covering a range of topics including investment and pitch preparation, go-to-market strategy, and customer acquisition and sales.

Bixel Demo Day 2017 Group Pic 1

The pilot program culminated with a demo day showcasing the program startups and bringing together investors, community-builders, and entrepreneurs to share the incredible progress made by each startup.

As part of this program launch, HelloAdvisr Founder and CEO, Ed Lee was honored to be invited to be an inaugural EIR advisor. Ed shared his expertise in pricing, monetization, go-to-market to the teams and program.

We are excited to continue to be on the growth journey of the current startups in the current cohort as well as the growth of the program and mission of Bixel Exchange!

————–

More About Bixel Exchange

Bixel Exchange focuses on the rapidly evolving segments of the high-tech ecosystem, including adtech, clean tech, digital media, gaming, mobile and social media. Bixel Exchange serves entrepreneurs by working with accelerators, incubators co-working spaces, venture capitalists, angel investors and private equity firms, universities, research institutions, innovation labs and government. To get to know Bixel Exchange better, check out its programs, events and partners.

Our Latest Guest Article on Gust Launch Community Blog

Gust launch community blog_article pic

HelloAdvisr, a Los Angeles based growth consultancy, and pricing and monetization specialist, was excited to be asked to share our pricing expertise with the Gust community of founders, entrepreneurs and angel investors. Our guest article introduced five key concepts founders and entrepreneurs need to know to start building a high-impact pricing strategy.

To read the full article on the Gust Launch Community Blog, click here.

To read more growth insights from HelloAdvisr, visit www.helloadvisr.com/blog or click here.

About Gust Launch:

Gust Launch is a cloud-based platform to help entrepreneurs and founders easily incorporate, run, and grow their company like a seasoned entrepreneur—designed by experienced startup founders, investors, and lawyers to help you from launch to exit.

To learn more about Gust Launch visit www.gust.com/launch

HelloAdvisr Share Pricing Insights in Guest Article for TechDay

TechDay_Pricing_Guest post_2017

HelloAdvisr, a Los Angeles based growth consultancy, and pricing and monetization specialist, was excited to guest write an article TechDay’s community of more than 10,000 startup and entrepreneurial members globally. The article shared three core insights on why the best companies in the world prioritize pricing and how this impacts growth for startups and entrepreneurs.

To read the full article on the TechDay HQ Community Blog, click here.

 

About TechDay: TechDay HQ Logo_Main

Each year TechDay hosts more than 50,000 people from 6 continents at events to connect and build the startup community. In 2017, TechDay hosted startup events in New York, Los Angeles and London (UK).

To learn more about TechDay visit www.techdayhq.com

 

Stop Wasting This Powerful Growth Tool: It’s Hurting Your Company

trash waste

Entrepreneurs and startups are innovators. They operate outside of the box because they believe the status quo isn’t good enough.

When it comes to building a growth strategy, many entrepreneurs and companies look to ‘de-risk’ by choosing the path most traveled. In the startup world, this can mean adopting strategies that fail 80% or more of the time.

By comparison, you have approximately a 46% chance of winning (or 54% chance of losing if you’re a glass half-empty type) by selecting at random red or black at a Vegas roulette table.

No, taking the road most traveled isn’t the only path.

Look deeper into your growth toolkit and you’ll find one of the most under-utilized – yet powerful – growth tools: pricing.

 

“Voluntarily conceding powerful growth tools shouldn’t be a option.”

 

For entrepreneurs and business leaders there are a lot of things that are out of their control. Pricing shouldn’t be one of them.

I’ve seen too many companies concede pricing to the forces of ‘that’s how it is’ or ‘it’s good enough’.

That’ is NOT good enough.

Leveraging your pricing now empowers you to monetize, market and sell your products better, and take a smarter approach to capture the value you’ve created. Here’s my advice on where to start.

 

Why Pricing is a Powerful Growth Tool 

The path to successful growth and success is varied. For every Snapchat there is Kickstarter who took more than 8 years to just launch let alone succeed.

One prominent VC, whom I highly respect, shared his view on assessing the potential of startups and fast-growing companies. He focuses on revenue growth drivers to gauge the financial and commercial health including units sold, the trend of units sold,….

Makes sense, right?

Except there is something missing in this revenue growth assessment: price.

 

  • Is the price right for the product or service?
  • Is the company capturing the value customers find in the product?
  • What future pricing opportunities does this company have?
  • How does the company know?

 

The list of questions go on and on.

Ironically, one of the things new ventures are able to control – pricing – is cited as one of the top reason why most startups fail. Yet receives surprisingly little attention relative to other factors whether it is price setting or management.

So let’s get back to basics: revenue is a function of volume (users/units) and price.

 

 

By this definition, to grow revenue, entrepreneurs have two drivers at their disposal.

Let’s take for example two growing companies A and B. They’re both growing revenue at about 50% per period, but company B is priced 50% higher.

 

 

The example is simplified but begins to illustrate the various paths to growth. The question you should be asking is which pathway is best for your company.

 

“All businesses should be asking: ‘does our growth 

reflect the value created by the company?’”

 

Pricing is a powerful growth driver and when used properly, materially impact your results.

 

Define Company Goals Needed Now (and Later)

In the chaos of growing a company, too often the goal is simply to ‘do better’ or ‘grow more’. While the spirit is in the right place, articulating clear goals and targets is crucial to designing the pricing strategy appropriate for your company’s stage.

If it’s not clear how your pricing is helping you achieve that, you run the risk of losing value – customer perceived and monetary – as you grow.

Here are some useful questions to help get you started to define your goals:

  • What strategy will get me to the next level (e.g. new markets, new round of funding)?
  • What strategy will get me to 100% revenue growth?
  • What strategy will get me ‘influential’ growth?
  • What strategy will get me to profitability?
  • …

One common question for growing companies setting goals is the question of profitability – how, when and how much.

It is neither unusual nor necessarily undesirable to sacrifice profitability – especially in the early days – for reinvestment. The poster child often cited for high growth, low profitability is Amazon. This reinvestment can be critical to product development, staffing, and marketing and sales.

What is critical to setting a goal of low or no profitability is what happens after the shorter-term reinvestments and goals are achieved. Some questions include:

  • How has your company defended your price position?
  • What can be done to regain any lost pricing power?
  • How can monetization of your products or services change to improve profitability?

My company recently worked with a national consumer products brand building a fast-growing range of healthy foods and snacks. Working with the company’s CEO, we were identifying opportunities through the company’s price and consumer strategy for the next stages of growth.

The company’s mission is simple but powerful: increase health and wellness in the daily lives of consumers by making healthy foods fun and accessible for all ages.

In 24 months, the company has increased its retail distribution and footprint across the U.S., partnering with some of the largest supermarkets and developed a strong and growing fan base.

For this company, the founder set out from the very beginning the company will grow, but grow profitably. Every growth decision took into account the short- and long-term profitability impact. This was the crucial executive direction that fed into the pricing strategy and defined early on a key measure of success.

This strategy is the right business model and strategy for this particular company. It doesn’t mean it’s right for every company. What’s valuable is setting specific goals early on and starting to anticipate the long-term impact of those goals later on.

 

Focus the Team to Start Work on Pricing Today

Acquiring and maximizing resources is the challenge companies of all sizes face, so it makes little sense to give up resources before having the chance to properly use it. Unfortunately, pricing is often used in this way.

I often talk about the critical role leadership has on pricing and high-impact companies. This includes the vision leaders have about their product and service pricing, competitive positioning and the communication with customers.

This leadership also includes rallying the troops to work on pricing now, because pricing only gets harder with growth.

Spotify, founded in 2006, has become the world’s leading music streaming service with over 140 million users. In the early days, Spotify needed to accelerate adoption, so in addition to positive word-of-mouth, also introduced a freemium price model to decrease sign-up barriers.

In the early days, Spotify needed to accelerate adoption, so in addition to positive word-of-mouth, the company also introduced a freemium price model to decrease sign-up barriers. Adoption was rapid and investors jumped on board.

Fast-forward 11 years and Spotify has been able to increase their paid user base to 40% or about 56 million users. After a decade – and millions of dollars invested on pricing tactics such as incentives and discounts – a majority of Spotify users still does not pay for the service.

The paying customer base is not immaterial, though. As of June 2017, Spotify’s paid user base is 100% greater than their nearest competitor, Apple Music. Yet to reach this level has taken considerable resources – and will continue to do so – to convert and retain paid users. It was a decision to take this volume-driven path, but one they continued down with few alternatives.

Most companies don’t have a decade (or the runway) to figure out what works. Most companies are lucky if they have half that time. Which is all the more reason why pricing and monetization must play an earlier role in the development and launch of the product or service.

For entrepreneurs looking to a “pivot later” pricing strategy, can reference companies like Spotify and assess the scale and conditions required to reach a similar position.

 

Final thoughts: Don’t Make the Mistake of Overlooking Your Pricing 

Pricing is a strategic and tactical tool to achieve a range of outcomes from profitability to growth. What is vital is not to overlook or concede pricing as a tool to achieve desired end goals.

As entrepreneurs examine the next steps for growth, some important areas to examine:

  • Think about pricing early and often. If you don’t, your competitors will.
  • Pricing helps to position the product. It’s always easier to go down than up.
  • Pricing influences the direction of growth. There is more than one way to drive growth, but achieving value-driven growth is harder at later stages.
  • Pricing capture customer insight and helps identify value. Knowing your customer better your competitors is a competitive advantage, and better pricing methods help better capture this insight.

 

“Victorious warriors win first and then go to war.”

– Sun Tze

The power of pricing starts with the practice of being proactive. I’ve seen too many companies concede this power too early on, making recovery difficult at best and company crippling at worst. Don’t let this happen to you. Better pricing is a powerful tool that can help your company thrive and sets you apart from the crowd, but it starts with now.

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:contact@helloadvisr.com 

Get our latest updates and insights by subscribing to our newsletter and following us on Facebook, Twitter and LinkedIn.

The Unlikely Pricing Leader: Lessons from an Industry Innovator

Building a successful restaurant is hard.

The hours are grueling. New menus and dishes have to be created. Customers taste shift constantly and competition is fierce.

With all that effort, the profit margins are small and future upside or exit opportunities are limited.

Within this context, more than a quarter (26%) of new restaurants fail in the first year.

Despite the uphill climb, entrepreneurs, chefs, and food lovers continue opening new restaurants. A true labor of love.

The parallels with the entrepreneurial boom we see today are striking and there are important lessons we can draw from this highly competitive industry.

One restauranteur and business leader who stands out is Danny Meyer, CEO of Union Square Hospitality Group (USHG).

 

Danny Meyer CEO USHG

Photo Credit: Union Square Hospitality Group

 

Meyer has built USHG from an innovative award-winning restaurant to a global restaurant group comprised up of world-class Michelin starred restaurants (Eleven Madison Park) to a publicly-traded burger chain (Shake Shack) now in more than 10 countries around the world.

In Meyer’s 30 years, he’s built a long resume of successes as a disruptor and innovator. But his impact as an industry leader transcends food, but onto how restaurants build viable businesses.

 

Doing the Unthinkable? Making Hard Leadership Choices

In the 1990s, smoking in restaurants and bars was legal in the U.S. When a patron entered a restaurant, they were asked if they wanted to sit in the smoking or non-smoking section.

Anti-tobacco campaigns were building some momentum, but nothing sufficient to codify into law. So it was hard to imagine a world where restaurants didn’t have a smoking section. Except, Meyer’s saw the world differently.

Meyer’s believed smoking happened to someone whether they liked to or not. Even in a non-smoking section, no one could avoid the smoke from the smoking section. So in 1990 – twelve years before it would become law in New York– Meyer decided to do something almost unthinkable at the time at the time, he started banning smoking in his restaurants.

From a commercial perspective, the ban was notable because most in the industry predicted this new policy was the equivalent to commercial suicide.

But Meyer understood his customer.

He understood the option to smoke was a restaurant feature, not the benefit. In pricing, understanding the difference is a core pillar to value pricing. For Meyer, he knew smoking was not why customers went to his restaurants.

 

“[Customers are] not going to quit going to great restaurants just

because they can’t smoke.” – Danny Meyer

 

The result? A small dip at first, but no material impact on his restaurants.

He made a calculated bet his restaurants’ value transcended the ability to smoke and customers were willing to dine and pay (high prices) for the opportunity to enjoy his ‘product’.

There was risk involved in introducing this policy, but Meyer’s made a calculated, and in case, principled risk. His decision took guts at the risk of losing customers (volume). He also had clarity and confidence in his value proposition and the customers he served. Certainly more than the doomsday competitors in the industry.

Fast-forward almost three decades and smoking are now banned in restaurants and bars in 80% of the 60 most populated U.S. cities.

 

Redefining Pricing in Food & Hospitality: “Hospitality Included”

Tipping is an American sport. If you travel to a new city on business, you can easily tip 4 or 5 service providers before you enter your hotel room. For the vast majority of the world, the idea of paying someone more for a job they are required to do is a foreign concept.

The lesser known fact about tipping is the dependence the hospitality industry has on this supplemental income. Apart from food costs, wages comprises one of the largest costs for a restaurant. Yet as minimum wages continue to increases across the U.S., the squeeze on margins continues.

Tipping also created wages disparity within restaurants. Front-of-house employees (e.g waiters, maître-ds) took a lower alternative minimum wage but made up for the difference in tips. This could be significant as tips are multipliers of the menu price, so in higher priced restaurants, front-of-house can make substantially more than their salaried back-of-house (e.g. line cooks) peers.

This posed a few problems for restaurants including the challenge of hiring and retaining quality cooks. This also reduced the supply of cooks in high-cost metros like New York City as the salaried wages could be insufficient.

In 2015, Meyer aimed to change the economics by introducing a new program call “Hospitality Included”, which eliminated tipping from all USHG restaurants.

Hospitality Included was designed to eliminate the wage disparity within the restaurant, increase cook retention and ‘future-proof’ USHG from future minimum wage increases.

The burden of Hospitality Included would fall on customers through higher menu prices. In an already expensive food market like New York, this could mean average price increases of 20% or more.

 

“… if [customers are] willing to pay higher prices, it’s going to make it

easier for everyone else.” – Tom Colicchio, Chef,  restaurateur and TV personality

 

Introducing Hospitality Included is a tough decision, but strategic. Meyer was attempting to undo the industry compensation model and recondition customer price knowledge and perceptions.

Meyer understood, not all restaurants and owners had the stomach for the price increases and changes to the wage structure but knew he could get ahead of his competition.

A restaurant’s cost structure, in its present state, is unsustainable. By reworking the pricing and business model he positioned USHG to invest in people (recruiting and retention) and the commercial growth. Through this program, he also shapes customer menu price perceptions and the user experience of dining – from how bills/checks to service expectations.

Meyer demonstrates why leadership is critical to pricing and pricing success, but the tremendous impact it can have on driving growth by redefining customer perceptions and experiences.

 

Final thoughts

While Meyer and USHG are best known for the innovative food and high-quality dining experiences, his experience as a business leader is invaluable case studies for entrepreneurs.

He demonstrates the importance of leadership in building successful companies. This is not only understanding what needs to be done but making the difficult decisions to defend the value you create and want to expand on.

In an industry driven by volume and ‘me-too’ pricing, Meyer isn’t a follower. He’s been bold with his pricing strategy and understands the value pricing has on growing his company.

 

Source: National Restaurant Association

 

He values the powering of pricing to change behavior, influence perception and make a positive commercial impact. A critical lesson entrepreneurs and seasoned business leaders can learn from.

 

 

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: contact@helloadvisr.com 

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When is the Right Time to Work on Pricing?

Maximizing time is engrained in the DNA of business leaders and entrepreneurs. Time is one of their most precious resources. So it’s not surprising entrepreneurs and business leaders look to improve how they use their time and results achieved.

When it comes to pricing, finding the ‘right’ time to get started is one of the most common questions asked. No one wants to waste time on low-impact activities.

So when is the right time to work on pricing? The answer is now.

Surprising? Shouldn’t be. Pricing is a material opportunity to help your company grow and thrive. It impacts growth from revenue and profits to customer acquisition and retention.

There are many reasons why pricing is deprioritized or tabled. Not enough time. Not enough resources. Don’t know where to start. The list goes on.

If you have this list consider this fact: the best companies are awesome at pricing. Disruptors from Amazon, Apple and Netflix to more traditional companies like Wal-Mart, Starbucks and GE are dedicated to pricing. These companies made the conscious decision to be great at pricing.

 

“The best time to start working on your pricing is now.”

 

If you’re not working on pricing (or have the urgency), there’s a good chance a few of the following are happening at your company right now:

  • No one really knows how to build your prices. Worse it’s a guess.
  • Competitors effectively set your prices when you ‘borrow’ their prices.
  • Your prices don’t reflect the value you believe your product delivers.
  • Your customer insight doesn’t translate to building your prices.
  • If a competitor introduces or changes prices, your team doesn’t have a plan of action.
  • You’re leaving money (and revenue growth) on the table.
  • If you’re not building pricing capabilities, you’re forfeiting a powerful growth tool.

Nothing on this list is great. Definitely not for a company looking to grow and build a world-class company. This doesn’t mean you can’t start on high-impact pricing work now. Let me offer some thoughts on how to make your pricing plan more productive.

 

Be Realistic: Set the Right Expectations

Pricing is hard and takes work; anything worth doing is. So if you’re asking the question of when to start, it probably means you and your company hasn’t worked on it for a while (if at all). That’s ok.

Instead of thinking of when to work on pricing in black or white terms – now vs. later – it is more helpful to think of in degrees and iterations. Like training at the gym, pricing is done in whole or in targeted sections. The key to results is a clear goal or objective, structured plan, and consistency in each activity. Your pricing plan should be no different.

Chances are your company doesn’t have the bandwidth to start a large price management project. Most Fortune 500 companies don’t either so you’re in good company. What can derail companies new to pricing is an overextended scope. While I love the ambition, sometimes there isn’t enough time, attention or knowledge (yet). Know what your pricing ‘win’ will look like and go after it.

 

Status Check: Identify Where You Are and What You Need

A common way companies approach pricing is assessing whether or not they have a price and does the company believes the price is ‘right’. This only scratches the surface.

An alternative to the simple binary view of pricing is to assess status, requirements and next steps based on the stage of your product or service.

If you’re still developing a product, chances are there is no price. Now is the time to build the building blocks of the price – from the level to the strategy. This requires insights about the customer, your company’s goals and requirements and the market and competition. The process also yields important product development implications. Pricing is a bridge between products and its impact on commercial results and customer experience.

If your product has launched or is ready for an update/refresh, the focus shifts to optimization and iteration. What have we learned about customers, competitors and the market? How will updated or new pricing be received? What pricing tests or trials have been developed?

I speak often about pricing questions and one of the reasons is it changes the mindset for what needs to happen next. The number of steps to a pricing decision is decreased, and for time constrained entrepreneurs and companies, this is critical.

 

Your X-factor: Leadership

Danny Meyer is one of America’s leading restaurateurs and CEO of Union Square Hospitality Group (USHG). Through USHG, Meyer has created an impressive portfolio of restaurants including the world renowned Eleven Madison Park to the global burger chain Shake Shack.

In 2015, Meyer introduced a new program call “Hospitality Included”, which eliminated tipping from all USHG restaurants. The program was designed to eliminate wage disparity found in restaurants between non-tipped back-of-house (cooks) and tipped front-of-house (e.g. waiters).

The greatest burden of Hospitality Included would fall on customers through higher menu prices. In an already expensive food market like New York, this could mean price increases of 20% or more.

This is a tough decision, but strategic. Meyer understood, not all restaurants and owners have the “stomach for it’, but he was going to get ahead of his competition. A restaurant’s cost structure is, according to Meyer, unsustainable, but by reworking the pricing and business model he positioned USHG to invest in people (recruiting and retention) and the business (future proofing new minimum wage increases). Through this program, he also shapes customer menu price perceptions and the user experience of dining – from how bills/checks to service expectations.

Meyer exemplifies why leadership is critical to pricing and pricing success. Pricing is hard not just on a technical level, but also operationally. One of the five-cores to what defines pricing is leadership and I talk about this every time I’m invited to give a talk, lead a workshop or teach a class. Pricing leadership takes vision and the stomach to make tough decisions that reflect the value you create and the company you want to run.

 

Final thoughts

While there may be no perfect time to start working on your pricing, there is a wrong time and that’s in the future. Pricing requires vision as well as technical and operational execution. For most, this is evolutionary. As your company grows, pricing only becomes more difficult. Pricing takes work, but the work is worth it for your company’s success, so there is no time to start than now.

 

Photo Credit: Visual Hunt

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: contact@helloadvisr.com 

Get our latest updates and insights by subscribing to our newsletter and following us on Facebook, Twitter and LinkedIn.

Pricing Gets Harder with Growth: Lessons from a High Growth Company

Obstacles and growth

As entrepreneurs, one of the most difficult decisions is how to monetize and price your product. Pricing is a ‘moment of truth’ (MOT) decision in the growth of a company. It is as important if not more important as signing-off on a product design, starting production or launching a website.

Pricing is a MOT because it helps define the product and company. This is when customers tell you how much value is between your product and their wallet. Despite the importance, pricing, unfortunately, takes a backseat.

What results is the rise of “good enough” pricing and the start of what we call corrective pricing. Corrective pricing is exactly as it sounds – prices that correct past pricing decisions that delivered undesirable results. This is not additive in building value; this is catch-up.

One of the common causes of corrective pricing is the belief entrepreneurs and companies will invest time and effort to build the “right” prices in the future. Except when they don’t. Not dissimilar with new years resolutions you make with yourself to go to the gym, life has a habit of getting in the way.

The irony for companies is with growth future corrections only become harder, more visible and more costly as time goes by.

 

Case study of Classpass: A lesson in pricing growing pains

Classpass has disrupted the fitness industry over the last decade. Its subscription-based platform offers consumers access to local fitness classes ranging from kickboxing to yoga outside the traditional gym setting.

Founded in 2010, Classpass made two hard pivots early in its history before taking its current form. Currently, it operates in over 30 U.S. cities and international markets, with several more cities planned.

With over 20 million classes booked and built a loyal consumer base, investors have taken noticed. To date, they have invested over $100 million into the promise of Classpass.

By most measures, Classpass represents successful growth and monetization, but look deeper at the pricing history, and a different story emerges.

 

Who’s captaining the ship? Price changes and more price changes

The last decade has seen the rise of the boutique studio such as SoulCycle, Barre and Crossfit and the evolution of the $40 fitness class. For comparison, the average gym membership in Los Angeles can range from $40 to $60 per month.

Classpass took advantage of this trend by offering a $99 per month unlimited plan; a fantastic offer for consumers.

In actuality, the price point proved more financially challenging for Classpass. In 2015 – less than 24 months after introducing the $99 unlimited plan – Classpass increased the unlimited plan to $125/month; a 26% price increase. A large increase by any standard, and clearly required for the company from a revenue sustainability perspective.

Unfortunately, the changes did not end here. Over the following 20 months (see chart below) a series of whiplash price changes would see the elimination of the popular unlimited plan, introduction of tiered and regional pricing, and aggressive promotions (in part to win back customers).

 

 

Hard (but avoidable) growing pains

One of the results of the series of prices changes is the lost of customers and goodwill. Classpass lost an estimated 10% of customers.

The management organization also took a hit most notably the replacement of the founder and CEO.

One of the core functions of pricing is to keep the company’s light on, and as responsible entrepreneurs and business leaders, that is what Classpass did. The margins relative to their cash on hand were originally misaligned and unsustainable at existing prices.

While things appear to be looking up for Classpass there are several takeaways all entrepreneurs can learn.

 

Growth = Complexity

Growth inevitably leads to greater complexity and layers to an organization and its operations. Anticipating and managing increased complexity is core function of an entrepreneur; especially the head of a growing company.

Know what you don’t know and how this gap will impact pricing and growth. This is the opportunity to build your pricing foundation with simple processes. This will ease the burden of managing price through growth.

 

Proactive pricing: Helping overcome revenue challenges

While pricing is not the most common term in the startup or entrepreneurial vernacular (on Medium, less 1,000 readers follow the tag ‘pricing’), pricing is a key growth driver that all entrepreneurs can influence.

Learning by doing is part of every entrepreneur’s DNA, but so is operating as effectively as possible. The idea you can go back and fix things later should be accepted as a relative concept. Ask the founders of Warby Parker, the eyewear makers with a billion-dollar valuation, how important it was to put in the work and get expert advice on pricing right from the start.

Like other efficiency hacks aiming for results with the least amount of cost/pain, why would any entrepreneur treat pricing differently?

 

Pricing drives growth: From startup to company

While the focus of revenue growth by many investors and venture capitalists is on influencing the volume-side of the equation, insufficient attention on price can have costly results.

Having a stronger grasp of the value proposition, customer insight and anticipation of pricing needs can have a huge impact on the health and trajectory of the company.

 

Final thoughts: Happily ever after?

While Classpass continues to write its story, what is clear is the role pricing played in its story of growth, customer brand building, and product development. Through the trials and shake-ups, Classpass has been able to raise another $70 million in investor funding.

Unfortunately, not all companies have this outcome. Pricing pain is preventable if proactive and treatable if you’re lucky. While hindsight is 20/20, ignoring the lessons of history is not advised. Some takeaways from Classpass’ journey:

  • Proving financial viability: Had Classpass not made the painful, but necessary price changes, the financial credibility needed to appeal to investors would be in doubt.
  • Building core skills: Through this experience, the several pricing lessons will help the company in the future. While most visible is the CEO change, the turbulent 24 months was an opportunity to assess internal pricing leadership and make required adjustments.
  • Managing future pricing complexity: While top-line prices may remain stable, other pricing tools (e.g. promotions) need active management. Especially with the large churn of customers, Classpass is actively using promotions to win new as well as lost customers. As anyone with a gym membership knows, promotions to win customers changes the value and perception of the product and potentially creating a promotional cycle needed to support subscriber volume.

 

        

 

As a founder of a LA-based SaaS startup recently shared with me, the work she’s putting into pricing is to find out what she doesn’t know. The initial aim is not to perfect her prices, but to avoid obvious mistakes and build the necessary process forward. A great mindset to take as she drives her fast-growing company forward.

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: contact@helloadvisr.com 

Get our latest updates and insights by subscribing to our newsletter and following us on Facebook, Twitter and LinkedIn.

Do Competitors Know More About Your Customers than You?

Man with binoculars

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.

  1. 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.
  2. 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.
  3. 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.

Final thoughts

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: contact@helloadvisr.com

Get our latest updates and insights by subscribing to our newsletter and following us on Facebook, Twitter and LinkedIn.