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One of the key success factors attributed by Co-CEO Neil Blumenthal was their approach to pricing and the early work they did to make sure their pricing was right.

Influence Of Pricing On Warby Parker

Warby Parker’s co-founders were originally going to sell their glasses for $45. This price was substantially lower than the average pair of eyeglasses where according to the National Association of Vision Care Plans, the average cost of a pair of eyeglasses in the US is $263 making Warby Parker glasses a fraction of the price.

The thinking was to make the price low to attract more customers and differentiate from the competition. But two early factors influenced their decision on the price: the desire to create a premium brand and the feedback from their business school marketing professor.

Building An Affordable Premium Brand

From the beginning, the co-founders knew they wanted to create a brand around Warby Parker, not just a low price commodity. They had a clear idea of who their customer was – young, tech-aware, cares about style but not looking to break the bank to achieve it.

To connect with this segment and gain credibility, Warby Parker ensured at launch they were going to be associated with this style group by having features in leading style magazines such as GQ and Vogue.

Another core element of their brand is the social mission. For every pair of glasses sold, the company gives a pair to a person in need. While not a social enterprise, Warby Parker made sure they created a brand that also connected with customers who are socially aware.

Finding Pricing Smarter

While building a brand was critical to the vision of Warby Parker, so was price accessibility. One of the early problems the company set out to address was tackling the high prices led by eyewear behemoth Luxottica.

The company reviewed their pricing with their marketing professor Jagmohan Raju, an internationally recognized expert in pricing, and the feedback was clear, the price point was going to be perceived as too cheap. Customer will question the quality of the product and weaken the brand positioning. The professor also pointed out that the revenue generated with cause issues for funding other functions – namely marketing – for the business.

The team went back to work and tested numerous price-points through customer research. The result was increasing the price by more than 100% to $95 in hopes of establishing a high-quality product and making enough profit for marketing costs.

Warby Parker also understood that they had to defend their price by reducing resistance to purchasing eyeglasses online. If the customer felt unsure or uncomfortable buying eyeglasses online, then they would find the price ‘not worth it’.

To address this friction point, Warby Parker introduced try at home, where customers can select up to 5 frames to try on at home. A customer can then see what looks and feels right, return the trial glasses and then order online. Not only does this make buying eyeglasses easier, but it injects value into the price customers were paying.

Closing Thoughts

Warby Parker’s early appreciation of the role pricing has on its brand, business model and customer satisfaction played an important role in setting up the company for growth. This early foundation has built up value with new and existing customers that enable the company to now not only increase prices of existing products but to introduce new lines at higher price points (now up to $145). The work the team put into research, test and manage pricing has created a unique competitive advantage for the company with the funny name, and an important lesson for entrepreneurs to learn from.

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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).

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 

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

The post The Unlikely Pricing Leader: Lessons from an Industry Innovator appeared first on HelloAdvisr.

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.

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