Stop Wasting This Powerful Growth Tool: It’s Hurting Your Company

trash waste

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 

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

The Unlikely Pricing Leader: Lessons from an Industry Innovator

Building a successful restaurant is hard.

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).

 

Danny Meyer CEO 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.

When is the Right Time to Work on Pricing?

Maximizing time is engrained in the DNA of business leaders and entrepreneurs. Time is one of their most precious resources. So it’s not surprising entrepreneurs and business leaders look to improve how they use their time and results achieved.

When it comes to pricing, finding the ‘right’ time to get started is one of the most common questions asked. No one wants to waste time on low-impact activities.

So when is the right time to work on pricing? The answer is now.

Surprising? Shouldn’t be. Pricing is a material opportunity to help your company grow and thrive. It impacts growth from revenue and profits to customer acquisition and retention.

There are many reasons why pricing is deprioritized or tabled. Not enough time. Not enough resources. Don’t know where to start. The list goes on.

If you have this list consider this fact: the best companies are awesome at pricing. Disruptors from Amazon, Apple and Netflix to more traditional companies like Wal-Mart, Starbucks and GE are dedicated to pricing. These companies made the conscious decision to be great at pricing.

 

“The best time to start working on your pricing is now.”

 

If you’re not working on pricing (or have the urgency), there’s a good chance a few of the following are happening at your company right now:

  • No one really knows how to build your prices. Worse it’s a guess.
  • Competitors effectively set your prices when you ‘borrow’ their prices.
  • Your prices don’t reflect the value you believe your product delivers.
  • Your customer insight doesn’t translate to building your prices.
  • If a competitor introduces or changes prices, your team doesn’t have a plan of action.
  • You’re leaving money (and revenue growth) on the table.
  • If you’re not building pricing capabilities, you’re forfeiting a powerful growth tool.

Nothing on this list is great. Definitely not for a company looking to grow and build a world-class company. This doesn’t mean you can’t start on high-impact pricing work now. Let me offer some thoughts on how to make your pricing plan more productive.

 

Be Realistic: Set the Right Expectations

Pricing is hard and takes work; anything worth doing is. So if you’re asking the question of when to start, it probably means you and your company hasn’t worked on it for a while (if at all). That’s ok.

Instead of thinking of when to work on pricing in black or white terms – now vs. later – it is more helpful to think of in degrees and iterations. Like training at the gym, pricing is done in whole or in targeted sections. The key to results is a clear goal or objective, structured plan, and consistency in each activity. Your pricing plan should be no different.

Chances are your company doesn’t have the bandwidth to start a large price management project. Most Fortune 500 companies don’t either so you’re in good company. What can derail companies new to pricing is an overextended scope. While I love the ambition, sometimes there isn’t enough time, attention or knowledge (yet). Know what your pricing ‘win’ will look like and go after it.

 

Status Check: Identify Where You Are and What You Need

A common way companies approach pricing is assessing whether or not they have a price and does the company believes the price is ‘right’. This only scratches the surface.

An alternative to the simple binary view of pricing is to assess status, requirements and next steps based on the stage of your product or service.

If you’re still developing a product, chances are there is no price. Now is the time to build the building blocks of the price – from the level to the strategy. This requires insights about the customer, your company’s goals and requirements and the market and competition. The process also yields important product development implications. Pricing is a bridge between products and its impact on commercial results and customer experience.

If your product has launched or is ready for an update/refresh, the focus shifts to optimization and iteration. What have we learned about customers, competitors and the market? How will updated or new pricing be received? What pricing tests or trials have been developed?

I speak often about pricing questions and one of the reasons is it changes the mindset for what needs to happen next. The number of steps to a pricing decision is decreased, and for time constrained entrepreneurs and companies, this is critical.

 

Your X-factor: Leadership

Danny Meyer is one of America’s leading restaurateurs and CEO of Union Square Hospitality Group (USHG). Through USHG, Meyer has created an impressive portfolio of restaurants including the world renowned Eleven Madison Park to the global burger chain Shake Shack.

In 2015, Meyer introduced a new program call “Hospitality Included”, which eliminated tipping from all USHG restaurants. The program was designed to eliminate wage disparity found in restaurants between non-tipped back-of-house (cooks) and tipped front-of-house (e.g. waiters).

The greatest burden of Hospitality Included would fall on customers through higher menu prices. In an already expensive food market like New York, this could mean price increases of 20% or more.

This is a tough decision, but strategic. Meyer understood, not all restaurants and owners have the “stomach for it’, but he was going to get ahead of his competition. A restaurant’s cost structure is, according to Meyer, unsustainable, but by reworking the pricing and business model he positioned USHG to invest in people (recruiting and retention) and the business (future proofing new minimum wage increases). Through this program, he also shapes customer menu price perceptions and the user experience of dining – from how bills/checks to service expectations.

Meyer exemplifies why leadership is critical to pricing and pricing success. Pricing is hard not just on a technical level, but also operationally. One of the five-cores to what defines pricing is leadership and I talk about this every time I’m invited to give a talk, lead a workshop or teach a class. Pricing leadership takes vision and the stomach to make tough decisions that reflect the value you create and the company you want to run.

 

Final thoughts

While there may be no perfect time to start working on your pricing, there is a wrong time and that’s in the future. Pricing requires vision as well as technical and operational execution. For most, this is evolutionary. As your company grows, pricing only becomes more difficult. Pricing takes work, but the work is worth it for your company’s success, so there is no time to start than now.

 

Photo Credit: Visual Hunt

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.

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.

Thinking About Your Monetization Model? 3 Things Entrepreneurs Should Know

Earlier this year, HelloAdvisr was privileged to be invited to University of Southern California (USC), where our CEO Ed Lee gave a guest lecture to talk about pricing and growth.

The entrepreneurship class on growth hacking was engaging with a lot of good questions from the students, but one question in particular stood out: how does a company identify the right monetization model?

It was a great question (kudos to the class!), because more often than not, the question from entrepreneurs and corporate executives is about what is the right model versus how to create the right model.

The goal is not the model itself, but rather the ability to achieve your growth goals including higher revenue, increased profitability and lower churn.  This requires the right approach to identifying and building the right monetization model for your company.

Here are 3 things you should consider to get started.


#1: Your model is tailored to your company

If you ask three chefs how to cook the best steak, you’re more than likely going to get three different recipes. The same is true for your monetization model.

To continue the food analogy, you can have many of the same ingredients, you have to make the final product that meets your goals and will be receptive by your customers.

A common challenge companies of all sizes face is to find models ‘that worked’. Many things go into the success of any monetization model and often times, more so for startups and earlier stage companies, many of the dependencies for success (e.g. talent, systems) are not there.

Longer-term, the question is how well any current adaptation will work as your company grows and evolves. Some planning in these early stages will help the time and resources required to attempt to adopt or build an entirely new model in the future.


#2: Your model is evolving 

As with pricing, there is a perception that monetization is static; you ‘set it and forget it’. But as any seasoned entrepreneur will tell you, no business looks exactly the same in year 2 as it did in year 1 whether it is the product or the company’s organization.

Like your product or sales process, the monetization model will change. Accept this truth. Then comes the fun stuff, the actual work.

A plan and process needs to be in place to enable your monetization model to evolve as your company and product(s) evolves. This starts with identifying the owners of monetization and pricing. Then will start to move to the processes and management to analyze and implement changes and manage monetization in the future.

These are all key areas that the company’s leaders must steer, leading to tip #3…


#3: Your model is top of mind for the leadership team

For entrepreneurs, there is a seemingly endless list of things to do but monetization and pricing should always be at or near the top. There should be time set aside each month or quarter to review progress and anticipate changes.

The last thing any entrepreneur wants is a missed opportunity, especially growth opportunities. Being proactive with your monetization model is one way to avoid this.

Longer-term, leadership will steer the ambitions of the company from market perception to revenue growth. Anticipating what monetization is required will require a close eye by leadership and can influence other parts of the business including compensation (e.g. sales team) or supply chain (e.g. consumer goods).


Final thoughts

As entrepreneurs look to build companies that are fast-growing, sustainable and (one day) profitable, building the right approach to the monetization model can pay dividends in the long run.

Like all things worth building, an impactful monetization model requires thought, development and execution. This starts from the leadership team, but should be embedded throughout the company. Almost as bad as missing an opportunity is having to recreate the wheel each time pricing and monetization has to be reviewed and updated.

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.

3 Pricing Misconceptions Entrepreneurs Need to Avoid

As consumers we’re constantly surrounded by pricing. Pricing when grocery shopping. Promotional signs in the store window. The latest email offer. With all the prices we see, it’s natural to build a comfort level with pricing and the purchase decision process. After all, we’re asked to compare offers, make tradeoffs and assess whether the price is ‘worth it’. Then why do entrepreneurs struggle with pricing?

We attribute this disconnect to misconceptions of how prices are set and managed. What we see time and again, is this perception that pricing from the entrepreneur’s consumer experience can be translated over to the commercial side of their business. The unintended consequence is the product’s value is under-marketed and -sold, and ultimately monetization and growth opportunities are missed.

Here are 3 common pricing misconceptions we come across working with entrepreneurs and companies.

 

Pricing is a benchmarking exercise

This is one of the most common misconceptions of pricing. There is a perception that prices are set and managed by benchmarking; if you know what others are charging then you know what to charge.

The problem is the thinking is counterintuitive. If your company is selling something – a product or service – that is ‘disruptive’ or better than the rest, then why do you allow the competitors you’re ‘better’ than to set how much you monetize?

In a conversation with one startup founder building a consumer service platform who explained they ‘mastered’ pricing because their company was ab/le to automate the benchmarking exercise with his primary competitors. There were three questions raised by this method:

  • Are the benchmarks ‘correct’? It was assumed the competitors he was benchmarking actually had the ‘right’ price compared his service. What he collected was what he believed were ‘market’ prices, but customers were still unfamiliar with the product, so much about the customer, offer and lifetime value is unknown.
  • Are the company goals the same as benchmarks? The goals he was trying to achieve differed from what the other, more established, competitors were aiming to do. He wanted to be premium versus competition and wasn’t interested in capturing a disproportionate segment of the market. This contrasted greatly with his market share-minded competitors.
  • Are the company’s products the same as benchmarks? He listed no fewer than 8 reasons why he believed, and states his customers agree, his service was superior to competition. Why then would he price his service or base his entire monetization model exactly the same as these ‘competitors’?

It would be a shame for so much value created in such a cool product be lost this early on, simply because the founder was going to follow what his competitors.

 

Pricing is just a number

Entrepreneurs often view pricing through their consumer experience and perception. The number paid for a cup of coffee, streaming video service or gym membership. Many companies and brands have been very good at giving a sense of price stability and predictability, so when a price change goes wrong, customers let the company hear it.

The problem, and where the misconception lies, is the belief that the objective of pricing is to solely get to a number and then ‘set it, and forget it’. The reality is pricing is more fluid than most entrepreneurs (and consumers) believe. The very best companies are actively managing prices as the value of the product changes.

One example is how Apple prices older generations of its iPhone or iPad. When they launch a new model, they recognize the value for their older generations are lower (also lowering demand) therefore lowers the price. In addition to older products, Apple is also differentiating newer models from a price perception perspective. They are ensuring the value gap with their newer products is sufficient and understandable for consumers.

What is key is matching consumer value to the prices set. This goes beyond just identifying a static number, but understanding both prospective and current customers on what drives their willingness to pay for your product (or not).

 

Pricing is easy

There is a beautiful imperfection to pricing that’s both rational and irrational. This doesn’t mean its ok to get pricing wrong. It certainly doesn’t mean pricing is easy.

One of the reasons why some companies are world-class, industry-defining or [insert your own description of awesomeness] is because these companies understand, among other things, pricing is not easy, but it’s important and to do it well it comes with work.

To be fair, for growing companies, nothing is easy. So much is learn as you go, including pricing. What is vital is recognize how much more complicated pricing becomes as the company grows. Not just the more technical components of setting prices, but also the execution and maintenance elements:

  • Is the Marketing team clear about how they will communicate the product and changes in price? Benefits and value?
  • Is Sales equipped to have difficult conversations to argue for higher/lower prices when speaking with prospective (and current customers)?
  • Is a consistent message in place if customer service receive inquiries about pricing?
  • Who on the team will monitoring pricing?
  • …

Like all things important to the company, pricing is not easy with many moving parts. The larger the company grows the bigger the challenge. Building not only the infrastructure to set prices, but components needed to monitor and maintain prices is not easy, but essential to win.

 

Final thoughts

Pricing carries with it many misconceptions that start from our lives as consumers. Yet continuing on this path can be harmful to the value entrepreneurs are building each day in their company and product.

Short-term, monetization opportunities can be lost, revenue growth not fully realized and development of necessary management processes are slowed. Longer-term, coming back from pricing mistakes and corrections carries both a financial and growth liability as well as a reputational and brand cost with customers and the market.

Being proactive is key and starts with the business leaders of the company to recognize gaps, and develop not only the technical component, but the processes and culture to actively manage pricing as a key competitive tool.

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.