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
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