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.

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.

 

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.

Why Better Pricing Builds Company Value

It was one of the most intense project I’ve been a part of. The project was challenging from all angles – from subject-matter to project logistics – but it would turn out to be one of the most valuable experiences to help me understand pricing from a company valuation prospective. Let me explain.

Our client was considering making a bid on a leading marketplace company. My team was brought on to offer strategic guidance on the pricing and revenue opportunity of the acquisition company. Put it another way, we wanted to know if there was reason to believe the company’s growth forecasts. (*If you’re a startup founder or an entrepreneur who has ever looked for or is currently looking for funding, the exercise of supporting your value and growth forecast should sound familiar.)

The core questions was clear. What we were after was more than an exercise about whether the numbers added up, but a deeper look at how pricing and the capabilities required to effectively price was in place to support growth. This meant challenging the existing price structure and levels for gaps, but also critically assessing:

  • Market and customer positioning
  • Competitive strength
  • Company’s processes and structure to execute

I talk to entrepreneurs and companies all the time about the importance of pricing to growth and commercial operations, but this project put into context how better pricing can enhance (or harm) a company’s value. Why? Because I saw pricing not only as a revenue and profit driver, but is also how pricing is used as a tool to position the company in the market, influence customer perception and operationally touches all parts of the company.

If you are looking for ways to start enhancing your company’s value with better pricing, here are some lessons I’ve acquired working with leading companies and startups to get you started.

 

Foundation: Understands pricing is about creating shared value, not just setting a price

You and your company spend enormous time and energy creating a product that will excite and enhance the lives of people who use it. The challenge most companies face is in extracting that value through pricing. Companies that look to create shared value between the customer (the benefits most valued in your product) and your company (extracting value by creating pricing structures and levels that align with customer benefits) do the most to enhance the company’s value.

Too many companies and leaders fail to see that pricing evolves and iterates from the moment a product idea is conceived. There is definitely science behind pricing. There is also an art that must be managed. Customer preferences and requirements evolve and the product iterates. Pricing should at least keep pace, and even better to get out in front before changes occur. Loss of monetary value can and should be avoided, but requires an early recognition of the role of price to the growth story.

 [No. 1 cause of startups struggling] “they don’t charge enough for their product”
– Marc Andreessen, Co-founder of Andreessen Horowitz

A company’s ability to iterate and innovate pricing is a powerful way to assess how company extracts value and creates willingness to pay for the benefits created for customers.  Moving from a foundation of simply setting a price to pricing holistically – from product to customer to financial – brings tremendous value not only in the immediate future, but also long-term.

 

Operations: Pricing shows how the company is organized and executes

Companies today understand that silos between teams and functions can harm team culture and the ability to successfully execute. Unfortunately, the pricing function too often sits tucked away in a gray area, like an organizational orphan.

What makes pricing unique is that it touches all parts of the business from finance to marketing, sales to customer service, so it’s vital that the feedback loop between groups is regular, connected and integrated for future pricing decisions.

This also means having the right individuals and teams in place to champion the pricing processes. They go beyond surface level insights (e.g. price is high/low) and asking the questions that assess the value of your product and assign prices. The organization and process is designed to increase confidence in the pricing decisions made, not add bureaucracy.

“If you have to do a prayer before you raise the price 10%, then you’ve got a terrible business”
– Warren Buffet, Chairman Berkshire Hathaway

When there is disconnect – where teams are excluded or processes not seamless – is often when challenges arise and impacts revenue and growth. This ultimately harms the value of the company not only in opportunity cost caused by delays or partial rollouts, but raised concerns of future ability to successfully implement.

 

Leadership: Pricing shows how company leaders make decisions and executes

“The best business? It’s one where you can look in the mirror and say, ‘Today, I’m
going to raise prices.’ And you can do it.”

– Warren Buffet, Chairman Berkshire Hathaway

I love this quote for many reasons, but what always made this so instructive is the insight that pricing is not just about setting the level, but the leadership to achieve the prices required to help a company thrive. Pricing is a leadership question and Buffet challenges leaders to understand the value created and the confidence to extract that value.

As simple as that may sound, many leaders balk at executing a new price or changing existing prices. I’ve seen it many times irrespective of the company’s industry, size or geography. There is a natural fear that leaders feel they (1) don’t have enough analysis to make a decision, (2) don’t believe the analysis they have to make a decision or (3) even with evidence, an aversion to risk rocking the boat.

This is not to suggest non-action is necessarily bad action, but to highlight the large responsibility of company leaders on how well pricing is executed. The pricing can be high or low, tiered or dynamic, but figuring that out and taking it to market impacts the company’s on-going value creation. Eventually leaders have to figure out pricing and value extraction, and failure to get a handle on pricing and its execution can end in more challenging transitions.

 

Final thoughts

I can imagine what many entrepreneurs and startups must be thinking, “this may apply to a $1bn company, but is it really relevant for my early-stage start-up?”.

My response? Is it absolutely relevant.

Pricing and monetization is a core component and competence of any company; and a core driver of the company’s value. What many companies are learning now is that pricing is not a bolt-on of something to do in the later life of a company or after a product has a ‘steady’ following, but a core test of early product-market-fit and assessment and refinement of the value the company can create.

This is hard, but the implications are so widespread and important. These pricing decisions (or lack of) can influence product perception and value, customer retention, the financials to sustain the company or the current runway and so on and so forth. Successfully innovating and building better pricing positions your company to confidently build the value created and future prospects for growth.

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.

How to Prevent Your Growth from Going Flat

You’ve come up with a great idea and built an awesome product or service. You’ve won customers, some who actually pay you in more than fandom and gratitude (read: money). Best of all, you’re getting customers excited in volumes you never expected.

Great job! So what’s next?

Don’t let growth go flat

Building a company is an interplay of both the short- and long-game. While the burst of speed may feels great, it’s vital to keep a critical eye on what is fueling this growth.

9 of 10 startups fail (vs. 6 in 10 restaurants) and it’s not because these companies don’t know how to get out of the gate quickly. According to some VCs, failure is built into to their investment assumptions by expecting approximately 1/3 of companies invested will effectively not create a material return. Put another way, a company’s backer is expecting failure.

Look a bit deeper into the causes of failure, and 3 of the top 5 cited reasons are core go-to-market capabilities: pricing, proper market assessment and research and preparedness for competition. These are all things companies can proactively improve on, but it requires focus and planning.

It’s in these moments entrepreneurs need to scrutinize their growth to assess and learn, fill gaps and iterate as quickly as possible. This means asking whether the right type of growth is beng achieved including:

  • Is the growth sustainable?
  • How much of our growth is due to my pricing?
  • Are customers buying into the value proposition?
  • What questions should we be asking customers for our commercial decisions?

Preparing the company strategically and tactically is a critical action companies can take to defend against stale growth and here are two areas company leaders can focus on immediately.

Be relentless about your value proposition  

In an interesting conversation with the chief of staff of a public figure here in LA, we began talking about the productivity tools his team used and the companies behind these tools. He began sharing his experience using a particular SaaS product for their digital marketing and CRM from a fast growing VC-backed startup.

What began as just a simple product overview became a indictment on the product (and company’s) value proposition. He simply didn’t see the value why his office was spending more than 3-times more per month versus comparable products. He did not see the value and was instructing this team to begin transitioning out of the product and cancel their subscription.

At minimum, this startup didn’t sufficiently communicate their value proposition relative to price. Bigger picture this raises the question of when their pricing was last reviewed, sales account management and how this will impact related customers. Now the startup is on the brink of not only losing a customer and the recurring revenue, but also the bad word of mouth review, which is equally bad.

As an entrepreneur, delivering value and benefits must be in the DNA of the product and a critical component to the company’s success. Do your customers understand the proposition to the point they open their wallets and not only pay, but will potentially pay MORE (versus alternatives)?  Can you help show customers the value if it isn’t clear already?

One simple exercise is to start is matching the benefits your company believes it delivers to customers and compare against the benefits customers (paying and not) believe they receive. More often than not there is a mismatch. But this is an important learning to reshape the marketing and sales pitch as well as the offer and pricing presented. It’s vital to understand if you’ve actually sold your value proposition – the ‘why’ you’re better than other products or services – or if what you actually sold is a one-time deal or promotion.

Identify capability gaps to monetization and pricing

I once had a entrepreneur who reach out to me for growth advise for her platform startup. When I asked her how I can help, she said simply ‘I need to know what I don’t know’.

It’s this type of gap analysis many entrepreneurs and startups don’t do especially when it comes to pricing and monetization. This is even more true when things appear to be going well, but I’d argue this is precisely the time to look at current processes, skills and tools.

For startups and SMBs, resources are limited so any given individual or team is often responsible for multiple functions. In the early days, rationing resources is critical, but much like how marketing or sales experience is vital to growth, so are developing skills to monetize and price.

If you’re not yet monetizing…figure it out. This doesn’t mean put a price tag on everything, but it does mean honestly determining whether you’ve created enough shared value where both the company and customers are able to benefit.

It also means identifying where value is created for customers (read: why they love your product) and ultimately assessing whether there is a price they are willing to pay.

There may be a friction point too high to monetize or may be inopportune to attempt to monetize now. That’s ok. The bigger concern for leaders should be not understanding that this fricition existed at all.

But beware, because waiting too long to monetize – if this is the what is ultimately what your company plans to do – can also create future challenges. As customers use your product and understand your company, they build ‘institutional memory’; a level of expectation of what your company will deliver.

Pivoting away from this institutional memory creates new expectations and interpretations of value. So companies need to figure out what process is needed to to execute – marketing, sales, PR/communication, customer service – and what capabilities need to be developed or acquired.

Pricing is one of those activities that requires all corners of the company so leaving this to ‘the person who does pricing’ leaves open risk of delays, incomplete rollouts and worse, unhappy and confused customers.

If you are monetizing… is this where you need to be and is it sustainable? Your customers now have a point of reference of what is the price for the benefits they get from your product. Is this develop and structure of pricing enough for your company strategically? Financially?

Pivoting from what was ‘good enough’ pricing or a monetization strategy sufficient to go-to-market must be thoughtful and planned. Doing otherwise can not only hurt growth, but also upset the crticial trust equity your company has built with customers.

Customers don’t like change if it mean it’ll cost them more and the value-added benefits aren’t clear. Larger companies can (but sometimes barely) weather the ‘pivot storm’, but for startups and SMBs, this can truly be costly.

The best market making companies like Amazon and Starbucks get ahead of the curve and not only build capability, but install it into their culture very early on. Postponing can create an opportunity cost to growth. Even the nimblest of companies move slower when they gain scale with more opinions and stakeholders to every decision.

Your monetization model should always be evolving, but how well it evolves will depend on your company’s ability to develop the required capabilities to execute.

 

Final thoughts

All the effort to get your company and product to where it is now must be applauded, but this is the beginning.

There are no short-cuts to thrilling customers and winning your market.  You will have to constantly strengthen all facets of your business.  What you’re working towards is a strong(er) FUTURE position and focusing on what’s driving your growth is critical to ensuring the growth you’ve achieve doesn’t go flat.

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.