Value Debt In Pricing: How To Avoid A Slow Startup Death

This article originally appeared in Techstars.  

When startups are out to create value to customers, they are often focus on a single path of value delivery – from company to customers. For many startups this is why they exist; to build solutions for problems in the market. The focus is on building products and services, and the allocation of resources to fuel the sales and marketing engine to get those solutions into the hands of customers. 

This is the easy part: the playbook for building product and acquiring customers have evolved massively over the last decade. 

What is more complicated and transparent is how startups receive value in return for their innovation specifically through price. How do startup leadership teams actively manage pricing or find ways to capture more value through pricing? Often called a dark art, pricing is a perpetual challenge for startups not only to create strategy and  learn new techniques, but also the active management of customer perception and value proposition creation.

As a result, startups fall into a state of value debt where they are continuously receiving less value in exchange for the value they deliver. The short-term impact is the maintaining a system that requires greater results and applies pressure to already limited resources. The long-term impact is on the sustainability of the system and company without outsized injection of resources (e.g. investment). The unfortunate reality for many startup is value debt takes them down a path of potential failure. 

We have identified four signs that a startup is in value debt. These signs are identifiable and measurable ways a startup can determine how far into value debt they are in, but also identify ways to work there way out of value debt. Each sign focuses on three areas: value through pricing, customer value drivers, and acquisition. 

 

Read the full article on the Techstars website. 

 

 

 

 

 

 

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Our New Pricing Survey Report: A Look At How Entrepreneurs And Startups Approach Pricing

HelloAdvisr Pricing Study Report Fall 2019

“How do entrepreneurs and startups approach pricing?”  

With the recent debate on startup growth and sustainability, the topic of pricing and business models is current and relevant. 

Business models and their viability are under increased scrutiny, and how businesses choose to price will directly feed those business models and the growth assumptions they’re driving. Even outside the headline grabbing companies, we know pricing and business models are direct contributors to success and failure. 

So how do entrepreneurs and startups approach this work? It is a question we are always asking, but could not find more structured insight on how entrepreneurs and startups approach pricing. To help broaden the this discussion around pricing, we decided to create our own and build a wider-context to the work of pricing by entrepreneurs and startups at all stages of growth. 

We looked at pricing on five different areas:  

  • Objectives; 
  • Pricing ownership within the company;
  • Process and systems;
  • Value exchange; and 
  • Role of competition.

Through our report, we want to help entrepreneurs to better understand what other companies are doing when it comes to pricing. More importantly, we want encourage entrepreneurs to take a critical look at how and why of pricing and inspire discussion on ways pricing can be improved in their businesses to support long-term success. 

So download your free copy of our report, and you’ll see how others approach pricing, and advice on ways to improve and capture more value through your pricing.   

 

The Core Principle Good Companies Miss In Their Pricing Strategy

The most successful pricing strategies are rooted in the pursuit of understanding people.

This is the starting principle I always emphasize to companies, founders, and executives. If you treat pricing like a discovery process of people, not only will it open opportunities on how to design your prices, but how, when and to what groups of customers you should sell.

This isn’t easy. As anyone who’s built a successful relationship with another human being –personal or professional – can attest, this takes time, dedication and focus. Many leaders are hesitant and often not excited to invest time and resources to customer discovery. But the results, when done right, can be material and high-impact.

 

Know The Unknowns Of Your Customer

I met with a fast-growing social analytic platform with millions of users globally who wanted guidance on their pricing strategy for their newest product. Early in the assessment one of the first questions I had for the CEO/co-founder is to tell me who is their customer and why.

This question seemed to surprise the CEO, especially as his focus was about pricing. We continued along this line of questioning to discover that his customer was loosely enterprise customers, but what was still unknown is why these customers were right for his product, what value these customers would gain, and what pricing, sales and marketing is needed to win these customers. It was a difficult discussion, but necessary to identify the known unknowns and how much of the surface has been scratched.

Lack of specificity, like this social analytics company faced, is problematic for several reasons. Let’s look at three.

 

  1. Pricing: Without a clear idea of who the customer is, any pricing decision becomes increasing generalized. The best pricing is designed for willingness to pay, which varies from customer-to-customer or at least at sub-segment levels. The closer you move to generalized pricing, the more generalized the offering will become; losing opportunities to capture and defend your value.
  2. Product development: It is unclear what customer problem the company is looking to solve. Lack of understanding of the customer makes prioritizing certain development difficult; requiring the company to guess what features or functions their customers value most.
  3. Use of resources: Because this company didn’t know who they are making their product for—at least initially, building a sales process and the marketing assets needed to sell to the customer is challenging. Consequently the company will expend time and resources building untargeted assets and campaigns for vaguely defined customers.

 

Pricing is a supercharged force that drives revenue, profitability and customer acquisition when it resonates with the values of the right customers. With this in mind, before asking “should the price be lower or higher”, the question entrepreneurs and business leaders should start by asking “who is my customer?” and “what do they value most in my product or service and why?”

Industry-defining companies like Apple and Amazon are able to thrive because they are focused on building a customer-centric pricing process. To get to this level, you have to value understanding your customer with as much precision as you value getting to a price point.

So what steps can you and your company take to kick off the customer discovery process? Here’s some things to get started today:

 

1. Build: Compile key hypotheses around your customer

Go beyond demographics and dig deep. If you walked past a group of people on the street (or companies at a trade show), can you identify your customers?

Customer discovery is BOTH an internal and external activity for your team. At this stage, your team is compiling hypotheses about the customer and identifying which hypotheses your team must test and validate. Leave nothing on the table.

Make this stage an inclusive exercise. Collect input from any team or individual that must engage with customers – customer success to finance, sales to marketing. Each will have a unique perspective on what makes a customer, your customer.

What type of information should you collect from your team? To start, you want to understand the descriptives – who are they? Where are they located? What do they use?

You then what to compile assumptions your team is making on behavior, specifically around how customers assess and decide on what products and features to try, use and recommend. So this can include questions like: What parts of your product will customers value most? Why? What is the benefit derived? How do they assess the benefit? Is there a monetary value to that benefit?

The goal at this stage is to build a list of ‘operating knowns’ teams and individuals have been using to make decisions about and for customers. This means the answers to the questions your team builds is actionable.

One side result of this exercise is the identifying where misalignment within the company exists and to what extent. This is not the time to make corrections (yet) or to make judgments on any team. The goal is the bring the company into alignment to make pricing, sales and marketing decisions based on proof points, not assumptions, to defend those things matter most for your company.

Here are 10 questions your team can use to kick off the discovery process. You’ll not only create an initial description of who your customers are, but you’ll also find different perceptions – subtle and direct – within your own team.

  • What brands do your customer most associate with?
  • How would your customer use your product or service?
  • How would your customer assess and decide on whether or not to use your product (or something similar)?
  • What problem(s) would your product solve for your customer? What are the benefits?
  • Would your customer pay $1 to have the problem solved with your product? Why?
  • What would prevent your customers from adopting your product?
  • If they didn’t use your product, what else would they use?
  • How do your customers connect and communicate with new brands and companies?
  • What are your customers top three favorite existing companies? Why do they love them?
  • What companies do they not support? Why not?

 

2. Test: Validate what you believe is true about your customer

 After your team begins to fill in the blanks of what describes and drives your customer, now comes the fun part – test! It’s time for you and your team to validate which elements of the customer profile are true, what is missing, and what doesn’t align with your company’s objectives.

Here are 3 low-burn ways to start testing your hypotheses about your customer:

Go wide: Online surveys

Online surveys generally attract a broader audience than a focus group would, but is extremely useful in understanding a broader group of respondents

Online surveys are easier to design and launch, but because respondents will have a shorter attention span the questions asked must be precise and relevant to your test. Asking nice-to-know questions or launching surveys or 30+ questions will not only affect response rates, but also the quality of answer you receive.

Go deep: Focus groups

Focus groups provide a great opportunity to actualize who you imagine your customers are while collecting feedback. You’ll have an opportunity to not only ask pointed and detailed questions, but also observe reactions to questions and collect nuanced feedback.

The key to success with focus groups, is inviting the right cohort of participants through the screening process. Because the focus group will include a small number of participants – usually between 5- 10 people – you need to be talking to the right people, otherwise the results will not be actionable; wasting precious time and resources. Rely on the customer definition that you and your team decided on in the “define who your customers are” exercise.

Get out there: In-field testing

In-field testing provides the opportunity to learn about your customer based on location driven research such as in front of certain retail store, events or neighborhoods..

It’s important to note that the consumer data collected from this research strategy is time intensive and actionable insight is dependent on the quality of questions asked. This research strategy is advised when you’re looking for immediate results and directional insight that informs what to test next.

 

3. Assess and Actionable Decision making

Now that your team has tested core hypotheses about your customer, it is now time to translate the insight into action.

There is, unfortunately, no set formula on what items to prioritize first, but a good place to start is to focus on high impact items that move the needle on your company’s objectives.

Remember, the purpose of this customer research is not only to better understand who is your customer, but to better serve them by building products they value, design pricing – structure and level – that align to their willingness to pay, and go to market with sales and marketing activities that defend and excite the right customers about your product.

 

Final Thoughts

The steps outlined here allow for identifying and testing one of your single most important hypothesis: Does your product have the market fit with the customers you believe it does? And if so, what is driving value for your customer?

It is never too early to start this process, whether your company is just starting out or your company has reached a level of maturity. Customer discovery and the insights that come from the process, are critical inputs to make better decisions on how you’re going to market with your pricing, sales and marketing, but also how you’re allocating and using resources for product development.

Treat the process of learning and understanding your customer as an evolutionary process, because it will continually change. Your competitive advantage will come from the systematic process you build to proactively identify shifts and make high-impact decisions for your product and company.

 

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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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Do Competitors Know More About Your Customers than You?

Man with binoculars

When I meet with a new company, I start by asking the same two questions: What does your company make? What makes it different?

It takes a nano-second for the eyes of the entrepreneur or executive to light up in excitement. They talk about the product idea and inspiration. Walk through the cool features and functions their teams developed (or in-development). Then comes the big finish, the x-factor – why no one else is doing it and why this will disrupt the market. The enthusiasm is infectious. When presented right, you feel like they discovered fire.

Then I start asking the “money questions” – How much are you charging? Why will customers buy and use your product? Who are your customers? The response often comes in a little slower and less assured.

It is here when the customer insight gap appear. The insights collected are insufficient to make pricing and go-to-market decisions. To compensate, competitor data plays an out-sized role to make these critical decisions. This begs the question, do competitors know more about your customers than you?

Competition is important, but…

Competition is absolutely important and should not be underestimated. Where it becomes counterintuitive is when a company believes (a) the product is market defining; (b) the product is better than competition; and (c) customers will get immense value in using the product.

If either is true, then why are competitors playing such a prominent role in pricing decisions influencing your customers?

This is not how market leaders and makers approach pricing.

Apple recently announced HomePod, their new speaker and smart assistant hub. HomePod is a direct competitor to market leader Amazon’s Echo and challenger Google’s Home.

The price for Apple’s latest hardware? $349. That’s 90% more expensive than the Echo ($180) and 170% more expensive than the Home ($129).

Apple has historically positioned its products as upscale and premium. To justify HomePod’s positioning, Apple spoke to the customer. More specifically their target customer segments. The HomePod is designed for the music lover. It’s for customers who appreciate a premium listening experience and technological innovation. It’s for customers who love to have a piece of luxury design occupy a visible space in the home.

This isn’t branding, this is customer insight in action. Apple knows the customer they want to win and is going straight for them. They do not allow competitors to dictate their prices. Instead, Apple uses price as a differentiator.

Why some companies let competitors influence the value of their innovation

I understand not every company is Apple (yet). But all companies have three key tools to help win the market: product, price and marketing communication.

Conceding price from the beginning is a risky strategy. Often price concessions dilute product differentiation and growth opportunities. It is a growth strategy many companies have trouble pivoting from. So why do companies lean on competitors to determine their prices? Here are three factors I’ve seen drive this risky strategy.

Built-in market validation (with a pinch of fear)

It’s hard enough convincing your family and friends your product is a winner and worth paying for. Harder still with total strangers. When competitors are already in the market doing even half of what you’re doing, then there is access to pricing validation. If the price started from gut feel, even better there’s “data”.

Is this “right” for the company? Most likely not. The trade-off for the perceived ease and validation of competitor pricing is avoiding the necessary customer insight work needed by growth companies. It’s accepted as ‘good enough’ to move on.

Bridging the gap of incomplete and imperfect information is the value of comparables. It is a common tool used by investors to determine company valuations. Unfortunately, the risk that often bears out is the comparable is too superficial and not accounting material differences that influence outcomes.

Companies using competitor pricing as the market price run similar risks. The most obvious are creating perceptions the product is comparable thereby diluting the innovation and inherent value. The larger risk is missing the preferences and behaviors unique to your customers.

There is also the understandable fear of ‘going it alone’. For entrepreneurs, most moments of their company’s existence is a risk. I can empathize the risk aversion. Unfortunately, that doesn’t mean the right customer insight shouldn’t be collected and used.

Not asking pricing focused questions when gathering customer insight

Too often the customer insight is insufficient. What this means is relevant pricing questions are not asked. This is dangerous. These questions are critical for three reasons.

  1. First, these questions help inform the baseline perception about your product. Asking the right questions inform gaps to address via product, marketing or sales. It’s a lot easier influencing customer behavior when you know what they think about your product.
  2. Second, the right questions inform the relative value of your product. This can include competitor alternatives, specific features, and use cases. What is important is gauging influences on customer behavior and decision-making.
  3. Finally, this process builds into the company’s research DNA commercially-minded questions. It’s a different way of communicating with customers and sometimes a harder one. The goal is not to collect opinion, but understand the behavior of your customers.

This lack of insight decreases confidence to make a decision. Too often the insight is at a population and not target cohorts. What results is some blended pricing using competitor prices and costs.

Belief prices can change in the future

Like other parts of the business, some entrepreneurs believe that prices can be updated in the future so accept prices that ‘work’ now. As some prominent entrepreneurs suggest, get it out to the market and hear what the market tells you.

Unfortunately, pricing is one of those things that is less forgiving. Even when customers are willing to give a second chance, there is often no basis to believe the company is capable of the necessary correction.

One recent example is the highly competitive food delivery space where companies such as Sprig and Munchery competed for the dining table. There is an increasing downward pressure on what e-food companies prices led by increased dependence on promotions and discounting to win customers. This leads to a danger cycle which becomes very expensive and difficult to sustain.

Technology and operational fine-tuning provide opportunities to scale. As a ceiling is reached (read: cost savings), the unit economics makes even less sense as the customer’s willingness to pay was far lower than most of these companies could afford to offer. In the case of Munchery which was losing up to $5 million in a single month and recently closed Sprig was losing up to $350k per month.

When pricing receives too little attention too late in a company’s go-to-market, corrections are difficult. In addition to a misread of customer’s willingness to pay, these food companies were conditioning price perception with each new deal or promotion.

Hindsight is 20:20, but one has to wonder how much revenue and profit growth could have been achieved with a pricing strategy built on customer insight and value.

Get the insight you need

Entrepreneurs and companies can be proactive in gathering customers insight and take greater control of their pricing destiny.

While time is a key ingredient to customer research, some quick wins are achievable. Here are 5 things that can be done today.

1. Set goals: Know what you don’t know and fill in the blanks

Before asking a single question, define what insight is needed to push the product and company forward. The questions you develop based on these goals will give more impactful insights

2. Define early customer segments, refine and repeat

Sounds obvious right? Surprisingly many companies struggle defining who their customers are. Companies need to get specific or at least who they want their customers to be.

This is iterative so don’t expect the perfect customer profile the first go around. The goal is to peel away layers to get to the heart of what makes one customer group unique from another.

3. Build behavior questions, not opinion questions

A pricing truism I often share with clients and in talks: pricing is always important. It’s more valuable to determine what other factors are important and the relative value of those factors versus price.

Like an anthropologist, you are looking for behavioral cues. Focusing on behavior questions shed light on what customers value, how decisions are made and the inputs needed to form that decision.

4. Use every customer interaction as an insight opportunity

When entrepreneurs and companies hear ‘research’ they often imagine long projects resulting in a bulky report collecting dust. Customer research shouldn’t be avoided but practiced by the entire company.

Gathering responses from even a small cohort of customers can be powerful. These interactions shed light on what is valued, friction points in adoption and refine the proposition. Don’t miss these opportunities customers give you.

5. Link insights to go-to-market actionable activities

Insight gathering may seem like an end in itself. It’s not. You’re collecting insight so that it’s actionable. That means the things you learn from and about customers should serve how prices are set and communicated.

Insights should inform how marketing and sales campaigns are designed and measured. If you’re collecting customer insight that is not actionable, then stop. The goal is to reduce the number of steps to get from question to action.

Final thoughts

Going out and learning what you don’t know about customers can be scary and intimidating. Not doing so is riskier. Don’t dilute the value of your product even before you give yourself a chance to learn about your customers.

If you have a product (or building one) that is better for customers, then embrace the difference by not giving it away. Find what makes your customers unique and what drives them.

Don’t concede your pricing power without knowing what that pricing power is. If you accept competitor prices are right for your product, then eventually your customers will too. This is a losing and unsustainable position to be in.

If you bet on a ‘change it later’ strategy and not get the insights you need, you’re effectively mortgaging your pricing power. Don’t give up before seizing the opportunity to learn and win customers, which will pay dividends in the short- and long-term.

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

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