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.