Is “Good Enough” Pricing, Really Good Enough?

We’ve all been there. Our eyes crack open, look over at the phone or alarm clock and the panic sets in. We’re late.

Slow at first, but you go through a mental checklist to make sense of the situation and a plan forward. You know the drill:

1. Why didn’t the alarm wake you?
2. How much time do you have to get to work/school/appointment?
3. What do you need to do first? Shower? Get dressed? All at the same time?
4. Enough time to eat breakfast?
5. …

So what ends up happening? A little of bit of everything and just enough to be where you need to be.

For many companies and entrepreneurs, this perpetual sense of everything due yesterday isn’t new. In the rush and mountain of things to do, so “good enough” often has to do. Pricing usually falls in this category and it shouldn’t.

Pricing is one of those things where having something only ‘good enough’ today, can bite you in the ass tomorrow. Iterating on your pricing strategy isn’t as customer-friendly as iterating on an MVP product, which is why it literally pays to establish a price strategy early.

Below, I’ll walk you through three common pricing approaches and their pitfalls.  Then, I’ll get into the pricing best practices I recommend for start-ups and small businesses.

 

‘Good enough’ pricing approaches

I’m a big Jon Favreau fan (pre- and post-Iron Man) and love food, so when he made the film “Chef” it was perfect match. There is one scene (spoiler alert) where Favreau’s character, Chef Carl Casper, needed to prepare a menu for an important critic. The restaurant owner pushed for dishes with ‘proven’ success. Chef Casper knows this isn’t the best, and itching instead to innovate. Long story short, Chef Casper chooses the ‘proven’ menu and the critic goes on to pan the meal (product) and the restaurant (company).

Good enough pricing is often the search for what’s worked in the face of uncertainty. Good enough pricing is designed to not to lose a deal/customer. The mindset is not proactive (how do win a deal), but defensive (how do we not lose a deal). A subtle but powerful distinction.

The feels right

This is the pricing and monetization model that feels right. It makes sense and there is some data that helps justify the pricing. The model may feel right because it’s a pricing method used in another industry or competitor, or a false-positive validation by the lack of push back from customers.

The follower

You don’t want to rock the boat and get too far ahead (or behind) of the market so you price at or near competitor pricing. The follower assumes the prices used are correct and represents some of the product’s value.

The finger in the wind

No kidding. Some entrepreneurs and companies guess. Sometimes the price covers costs. Sometimes the price makes a profit. The aim is to close/convert the customer. So it’s about finding a price that will get there and as fast as possible.

All three buckets get the job done of getting to a price and winning some new customers. Except there are pitfalls…

 

Pitfalls of “good enough” pricing

Changing prices is hard

In the short-term, good enough pricing can undersell the value created by your product or service. It’s not unusual to hear entrepreneurs say their prices are probably too low, and many more finding it difficult to prove to customers that an increase is justified (especially absent any product improvements).

Moreover, if you raise your prices, customers have a (lower) anchor price to compare against and shape the value perception. When no clear upsell pathway exist, then customer sees the price change for what it is: a price increase.

Culture of bad pricing practices

The tradeoff for the speed and ease of good enough pricing is the lack of planning and processes necessary to price better. Why does this matter?  If pricing discipline is not prioritized, you almost guarantee that you will hurt potential revenue growth. You shoot yourself in the foot just as you’re starting out of the gate.

Difficult managing complexity

The damage caused by bad practices can be relatively contained in closed environments that operate within limited set of conditions. Adding new dimensions such as geography or industry creates complexity that demands a robust pricing strategy. At best, revenue growth is lost when pricing isn’t adapted to the complexity. At worst, new revenue streams are lost because the new product’s price is ill-suited for prospective customers.

 

Doing better than the ‘good enough’ price

Even taking small steps away from good enough into the ‘better’ pricing territory positions the company for future evolution and innovation.

Differentiate features from value offered 

This sounds obvious, but it is not uncommon for entrepreneurs to believe product features are interchangeable with value. This is a painful mistake that goes something like this.

Company: Our product offers features A, B and C that saves costs by consolidating systems and processes. Is this offer value to you?
Prospective customer: Absolutely! We needed something like this for years. How much?
Company: Our solution is $[price].
Prospective customer: Um, ok. The price is steep. What’s the price for just B? Can you take the rest out of the solution?
Company: ….

The exchange above is simplified, but is an illustration on how willingness to pay can differ to the value a company believes it is offering. Not only is it dangerous to confuse each feature as equally valuable, but it is vital to not give away value on those features customers will pay for.

Create pricing defenses

For entrepreneurs using “good enough” pricing, pricing defense begins when you realize you have no defense. Basically your army has been sent out with sticks and rocks, when competitors are coming by land, air and sea.  To avoid this, the following steps are critical in a company’s early days:

Identify what you absolutely need to defend, and be prepared to defend these vigorously.  You’re not just defending a product in entirety, but you’re defending the value customers find in your product. If you don’t know what you need to defend, you’ll be effectively defending against everything which is not effective or sustainable.

Build pricing fences to avoid self-inflicted wounds. It’s hard enough fending off competitors, but you don’t want to value to leak within your customer base. Pricing fences helps to differentiate products and features, while distinguishing offers for specific customer segments. For example, movie theaters offers discounted pricing for either value seekers or customers unable to go to see movies during more popular times. In this instance, time is used to fence these prices.

Identify your best customers, and fight for them. Not all customers are the same and you shouldn’t approach them as such. Some customers will have more lifetime value and others present better future opportunities. Define what you need to achieve, then identify those customers that will contribute most to that aim and build pricing that caters to these customers.

Integrate pricing to the product roadmap

In the short-term, most companies will not be able to release new products or features fast enough to confront challengers. Longer-term it is vital that the product roadmap and pricing work hand-in-hand early in the lifecycle. There are few reasons why it’s important pricing works alongside product development.

First, as the product grows increasingly complex or the product portfolio expands, how each are priced and monetized also becomes complex. Not creating a clear pathway early-on can cause customer confusion, lost revenue and over/under-selling of the product. This last point is important, because if the company doesn’t know if there is willingness-to-pay, a lot of time and money can be spent on something that had no monetizable value.

One example is when a new edition of a hardware product is developed. The new features are clear, but as many customers ask, how much better is the new version. Relative to that value, how will you price the new product versus the legacy. Going further, questions of inventory, discounts and promotions on the older model will need to be determined. Again all pricing questions.

Second, integrating pricing into product roadmap offers a valuable input into the products and features to be developed. This is when senior leaders and product managers can begin answering whether what is being developed is a nice-to-have versus value-adding. Especially when resources are scarce, pricing can help to prioritize development.   

Lastly, working alongside the product roadmap gives a temporary process to test pricing hypotheses to create inputs to make a pricing decision. When pricing is part of the development process then ‘pricing questions’ can be asked to vet the revenue potential and pitfalls. The result can very well be not to monetize but the product is of such value it must be developed. Having this process can make that decision rather lose time on the backend or attempt to monetize and then having to retreat from the decision.

Like a retailer who projects how a new product will fit into its range – pricing, customer-fit, etc. – entrepreneurs need to plan how new product development and pricing will fit into the overall architecture. Starting early in the product roadmap is vital.

 

Final thoughts

Good enough pricing, isn’t good enough. Too often we are victims of being rushed.   It doesn’t have to be this way. There are steps to take to upgrade good enough pricing and a few have been shared here. Entrepreneurs and companies looking for long-term success need to build their pricing roadmap. Just as in product development, processes and planning must be developed that are sustainable and adaptable to achieve the company’s growth ambitions.