Know Your Value: Capture Opportunities And Manage Uncertainty In The New Year

The new year is a blank sheet of paper. Time for new goals, renewed ambitions, and more wins. People are making new health and lifestyle goals. Professionals are updating career plans and objectives. Companies and entrepreneurs are excited about opportunities – new and old – that writes the next chapter of their company’s history. Everyone has an opportunist mindset. 

This optimism, unlike past years, is confronted by uncertainty and volatility in the economy and political environment as a whole. This has real consequences for companies big and small, and presents a real opportunity for companies build solid foundations to thrive in all conditions.

Navigating Uncertainty

Some investors are taking proactive steps to prepare their portfolio companies for a potential ‘winter’. For some this means preparing founders for a reality where the next round of funding – or injection of capital – will be harder to come by, or worse, not available.


“There’s a large cohort of founders who haven’t seen a down economy
and  that’s a risk to the ecosystem”

– David Frankel, Managing Partner Founders Collective

For others – including several companies we have spoken to – it means strengthening the bones of the company; greater focus on financial and operational fundamentals and practices to help thrive across market conditions. This means greater focus on managing things they can influence; going from guessing to certainty. At the top of most companies’ list is capital requirements and cost management.

Companies are looking to fund-raise sooner and for more while capital remains available and the cost of capital remains low. This also means a renewed focus on managing costs including a smarter use of existing capital resources, more efficient internal processes, more effective product development, more selective hiring/recruiting decisions.  

Another core element to the sustainability strategy is pricing and monetization. As much as companies focus on what goes out (e.g. costs), there is not equal time or effort spent working on and improving what comes in (e.g. revenue, profit). Knowing – not assuming or guessing – how to monetize and price products and services help to make better decisions on a core function of the company – how it makes money. 

The Power of Your Price

Taking the guess work out of pricing and monetization, reduces the opportunity costs of time and lost revenue and profits, and increases focus on the activities that have impact and avoids the things that don’t. 

Working on pricing is often overlooked, but is a proactive approach to build the company’s capabilities to compete and grow. Even the slightest of pricing improvements can take your company further than most imagine. In fact, impact on the bottom line is up to 3 to 6 times greater on a 1% top-line price improvement than increasing volume by 1%. Compared to a 1% decrease in variable costs, a price improvement can have more than 50% better impact to the bottom line.

Design An Inside-Out Pricing Approach

For a great chef designing a world-class restaurant, the first step isn’t to build the dish. Chefs design dishes around the vision and goals for the restaurant. They create menus and offerings that drive this vision. They work to win customer segment tastes and interests. Building effective pricing follows a similar inside-out approach. The focus is on answering key internal questions before getting to external presentation. That first step starts with strategy. 

1. Define your strategy

The definition of strategy is the high-level plan to achieve one or more goals under conditions of uncertainty. We share this often but the starting point is identifying what goals pricing is intended to achieve. Does the company need to increase revenue and profitability? Does the company need to accelerate market share capture? Being clear and upfront of what you are designing your pricing for can make a huge impact on outcomes. 

Reality is your company can’t do everything – most companies can’t – so prioritization and focus are vital. Much like you see in an idea funnel, the first step to developing an effective pricing strategy is creating constraints on the problem set. 

Companies can also take the strategy building exercise even further by assessing resources to invest to work on pricing – money, people, time – and define goal timelines. At minimum, defining the strategy and its goals is a vital first step.

2. Identify how you’ll monetize

Once you have defined what pricing needs to achieve, the next step is to identify how you will charge for your product or service or the revenue model. 

Discovering how we want to charge becomes as important than what we charge. Take for example a simple freemium pricing model. A portion of the product is offered for free, and customers who want more features or functions need to upgrade to a paid subscription of $5 per month or $60 per year. This could compare to charging customers a single one-time fee of $60 without a free component. Both can achieve the same revenue per customer for the year, but depending on the model used, can have consequences on longer-term revenue and profit opportunity, customer acquisition cost and retention, price perception, and so on. 

Figuring out how to charge is not as simple as selecting a model. The best companies understand that to design the right model to charge, you have to understand your customer – who they are, what makes them uniquely your customers, and what they are willing to pay. Structured research and analysis is a vital step to successfully determining the right monetization approach for the company. 

3. Set your prices

Most companies start here, but yes this is the last, not the first step, in the process. Too many companies and entrepreneurs we speak to start and end here, without recognizing what prices you charge are a result of your pricing strategy + monetization plan. 

There are three main ways to price your product or service:  

  • Cost+: Calculating the costs associated with developing and distributing the product or service, and adding an arbitrary percentage margin. 
  • Competitor-based: Perhaps most common for companies and entrepreneurs, this approach is to research either direct or related competitors and their prices, and making pricing decisions based on competition.  
  • Value-based: Highly research and testing driven, this approach enables companies to not only price based on willingness to pay, but can build products and marketing around customers and the things they most value and need. 

But this is not all…

4. Execute

For many companies this step is the go-to-market strategy. In the pricing world, a great pricing strategy goes hand-in-hand with execution. The marketing and sales efforts is ultimately designed to reduce – if not eliminate – friction in the minds of customers when they ask “is it worth it (for this price)?”. 

To begin executing on the pricing work you’ve completed, companies to start looking at: 

  • Leadership: The company’s leaders set the tone of how pricing is designed and executed in the company.
  • Process: The clear steps and internal owners to manage the review, changes and implementation of pricing decisions.
  • Rules: Rules provide accountability and remove ambiguity on company’s pricing, and also sets restrictions on price changes such as discounting. These rules set a powerful tone on how the company will go to market and how success will be measured. 

Much like the monetization step, research is a key success factor to setting prices. This requires identifying the right methodologies, work, and discipline, but will take the guess work out of the company’s pricing decisions today and in the future.  

Final Thoughts

Building a strong foundation and removing decisions based on guesses help to prepare for uncertainty and proactive seize opportunities. Working on pricing is one powerful way to be proactive.

Pricing helps companies to answer important questions vital to the commercial viability and success of the company. This is important not only from a top-line perspective, but also for the company’s efficiency and effectiveness in any market conditions. 

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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 

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