Fundamentals Of A Winning Business Model

At the core of every successful company is a strong business model.  

Your business model is the blueprint for how your business will make money (or not). But for many companies starting out, not enough time or effort is put into identifying the right business model for their business.

This can turn out to be a very costly mistake.

In a study by CB Insights on the top reasons why startups fail, a top ten reason (coming in at #7) is going to market with a product without a business model. 

It doesn’t have to be this way.

Designing the right business model for your company, product and goals are very much in your control. From our experience working with fast-growing startups to global corporations, we cover core elements to building a successful business model.  

 

What Is A Business Model?

Let’s level set by making sure we understand what a business model is, and is not.

According to John Elkington and Richard Johnson, “business models are what connects technology potential with real market needs and consumer demand”.

Another definition from management theorist Peter Drucker is that a business model is “assumptions about what a company gets paid for”. 

So there are two vital parts to understanding what a business model means for your business:

  • A connection between your product or services and the needs of your customer and market; and
  • A structure that defines your customer’s willingness to pay.

This is important because to build the right business model it will depend on how much we know about our customer, market, value proposition, prices, and financial requirements and resources.  

This requires information – the right information – to help us assess and inform the right business model for our company.

No small task, but all work within your control.

 

Why Your Business Model Is Critical To Your Company’s Success

Entrepreneurs and businesses understand that they need a business model, but too many do not understand what makes a good business model for their business.

A good business model answers core questions about how your business will operate, as well as the viability prospects of the company. A great business model creates a competitive advantage embraced by customers and differentiated to the competition.

Given the high stakes, your business model should not be left to guesswork and chance.  

 

Create and deliver value: How you bridge the gap between your solution and customers

Why your customers need a new product – more specifically your product – is not always obvious. This is especially relevant for new technologies and innovations.

Your business model is the bridge between the solution your company offers, and the needs and willingness to pay of customers. It is how customers make sense of your value proposition and the pathway to acquiring the proposed solution. 

 

Financial viability: How your company makes money

At the core of any business model is how a company intends to make money and profit from its products. The quality of the business model for a company and its product reflect whether enough money will be generated (read: profits) to achieve viability.

The business model also reflects how well the company understands its customer and market, to make a commercial enterprise capable of generating revenue and eventual profits. If the business model isn’t right, this can wreak havoc on the financial viability of your company.

 

Strategy: How your company wins customers and the competition

Too many companies – big and small – have a tendency for a ‘follow-the- leader’ mindset when selecting a business model. This can be an actual market leader with a commanding market lead and is setting perceptions on the value and prices.

Then there is the perceived market leader, where within an industry – often in nascent or technology-driven industries – there are companies competing with one another despite the vast majority of prospective customers don’t know the company let alone the value proposition or pricing competitors.

What this means is there is business model complacency that occur for many companies, leaving potential profits on the table, but also a missed opportunity to differentiate from competition. By creating business models that are like everyone else, there is greater pressure to justify the value proposition and the pricing question of “is it worth it?” – a tall order for many startups and new ventures.

 

Key Components Of A Business Model

Like pricing, a good business model doesn’t start by simply selecting between a menu of models. No, a good business model starts by understanding your customers for your product created by your company. A great business model is designed for the company, it’s customers, and the goals the company aims to achieve.

 

Your value proposition   

Developing an effective business model requires a clear identification of the value proposition and how you can differentiate yourself in an often-times crowded market.

As Peter Drucker famously says, ”Customers don’t buy products, they buy the benefits that these products and their suppliers offer to them.”

We often take for granted what our product actually does for our customers, leading to business models built on assumptions. Companies that are attempting to disrupt an industry, are particularly prone to this because they hold the belief that the disruption itself is the benefit.

Yet human nature is often resistant to change if not rejects change outright in favor of the familiar. That’s why when you go to the purchase page of some software companies you see a long list of features and benefits – a list made for everyone, and thereby for no one.

 

Your customer

The process of defining the value proposition and the benefit your product aims to deliver, the next question is, “who is the benefit for?”.

In our project experience working with companies from high-growth startups to large market leaders, the question of who is actually the company’s customer is commonly overlooked.

We take a tiered approach to the customer question that is based on the degree of connectedness the customer segment has with your product.

Imagine a series of concentric circles – like the rings of a tree trunk – where each circle gets smaller as you get closer to the center. While in aggregate, all the circles combined represent your desired market, it is those circles closest to the center that care most about your product and ideally, your brand and company.

Defining who those customers are, what they value most and the benefits they need to derive – whether through your product or a different solution – is critical. This enables you to create a business model aligned to your customer; not someone else’s customer.

 

Your pricing

The best companies are pricing experts because one of the most important parts of your business model is the pricing strategy.

An effective pricing strategy maximizes revenue and demonstrates that you really understand how your customers value your offering. The amount of resources dedicated to developing a pricing strategy also reflects how much time a company has spent trying to extract value out of its products. This involves monetizing different aspects of the product to serve the largest possible audience.

More advanced pricing strategies may use tools such as targeted discounts or promotions to increase revenue, and the use of other pricing design tactics. A good pricing strategy that captures the value out of your offering increases the odds that your business will be sustainable in the long run.

 

Your goals and resources

Creating a business model for your customer and company means self-discovery by your company of what it wants and needs to achieve. This can be to maximize revenue. It can be to penetrate the market and win market share. Creating a proxy for success steers how the business model is designed but also make changes as needed.

Creating a good business model also needs to account for resources needed to achieve your defined success. This may mean to make changes on how your company sources materials or talent, how your company acquires customers or shifting the business model.

When companies adopt a business model of market leader or look-a-like company, many input and output assumptions are made often to the detriment of the company. Rather than methodically evaluating inside on what is and is not available, attempts are made to fit their square (the company) into a circle (competitor’s business model).

 

Building The Right Business Model For Your Company

The types of business models available to you depend on the results of your work on the different components outlined above. This means a great deal more time spent on research and discovery as it is on selecting from a menu.

Even businesses that look similar at first glance could have dramatically different business models. Consider video game developers such as Electronic Arts and Epic Games. Electronic Arts have a traditional gaming business model and charge $60 per game up front. Epic Games uses a “freemium” model where games such as “Fortnite” are free to download and gamers then pay for in-game upgrades.

This has proven to be an effective strategy as Fortnite earned $300 million in April 2018, almost six times the first-month sales of EA’s highly anticipated Star Wars Battlefront II. Epic Games’ business model requires the company to engage customers over an extended period of time but Electronic Arts just need to make that first sale. Their respective business models don’t exist in a vacuum and are designed to achieve commercial objectives

It is also important to be mindful of potential pitfalls when building a business model. If the price is wrong, the analysis that follows will be fundamentally flawed. Targeting the wrong customers means that the business model will emphasize the wrong product attributes. Every assumption in a business model needs to be checked and rechecked.

 

Final Thoughts

A company’s business model is a key success factor in both the short- and long-term.

A good business model identifies the core customer, their pain points, and how specific products or services can address those issues. The best and most disruptive companies create not only amazing products but a business model that connect paying customers to their solution.

But success comes not only through the ultimate model these companies chose, but the fact that the model was uniquely their own, for their product and customers.

Business models might serve as a blueprint for a company’s future but those plans aren’t static. Business models evolve over time as companies better understand their customers, the value of their offerings, and their competitive positioning. Evolution doesn’t necessarily mean a complete overhaul. It is a commitment to making actionable adjustments (e.g. pricing, product offering) that meet the needs of the market for now and beyond.

 

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A Easy Guide To Designing Customer Research

Whether or not the customer is always right, the customer is always the one who makes the purchase decision in the end. Over the past few years, more and more companies have shifted to a customer-oriented business strategy as the impressive performance statistics of these businesses roll in. CMO Magazine reported that customer-centric businesses have been 60 percent more profitable than their peers, and nine out of 10 CEOs surveyed in the US have agreed that they will invest in programs to strengthen customer engagement in the year ahead.


Building A Customer Focus Journey

The basic starting point is the customer focus journey. According to the Harvard Business Review, this journey generally follows along four stages:

  1. Info gathering – where the company uses a dedicated team or third party to collect information about their existing customers and desired customer segments.
  2. Data mining – where past customer behavior is analyzed to build a working model of customer motivation and a series of ideal customer personas.
  3. Predictive analytics – where a separate team builds on data analytics to discover and propose future pathways for customer-oriented product and service development.
  4. Active engagement – where customer wishes and preferences are accommodated collaboratively in real time.

One aspect of this journey that may come as a surprise is that many companies, especially startups and entrepreneurs, do not do their own customer research, especially in the early stages. For many, the process of what information to collect, why it is information and how will the information help to make better future decisions is often loosely constructed, if at all, early on.   

There is no question that customer research is a core component of a successful company. Unfortunately, companies that don’t put in the work to know who their customers are or what those customers want are at a substantial disadvantage in competitive markets.

Customer research helps company leadership teams figure out their competitive strategy, product development and go to market including their pricing strategy. Not speaking to your customers puts you in a position where you’re making pricing, product, sales and marketing decisions in a vacuum.


Best Practices For Designing Your Own Customer Research

When it comes to customer research, many entrepreneurs and business leaders share a perception that this is simply too difficult or time-consuming (read: not scalable). Fortunately, that doesn’t have to be the case as long as the research – like any good test – is well structured, well planned and well executed. Here is a useful template for launching your customer research project in the right direction:

1. Define your objectives

Create a clear set of goals your research must help you achieve. This might involve defining the customer segments, identifying customer attributes, preferences for specific features, pricing, etc. Limit yourself to the two or three highest priorities.

Here you want to think about the key questions that you either don’t know or assume to be true about your customers. Be precise in the language you use. Consider how customers would interact with your products/services and which factors would discourage them from engaging with you.

Think two steps ahead of the typical answers customers give. You are looking for insight that gets at what is really needed to move forward with your market strategy. As you build your objectives, consider how the insights from the research will be used. Ultimately, the goal is to design research that is directly actionable and aligned exactly with your top objectives.

2. Define your audience

The next step is to create a persona for the type of customer you want to speak to. Get as detailed as you can about the customer segment. Investigate who your customer are now and think about who you want to attract for the long term. When you find your target, look into where they are spending their time to determine how to attract them. If you can’t tell, ask.

If you still struggle defining your audience, one source of inspiration is ad targeting platforms like Google Ads or Facebook. Facebook’s ads platform is a useful guide on factor defining customer segments; even if you are not going to do Facebook ads.

3. Design your customer research tool

Customize existing tools to fit what you need. Gather data on great online surveys, in-person interviews, focus groups and industry trend reports. Then you can improve and refine them to suit your purposes. Each tool will offer different benefits for collecting the relevant data and insights that go into intelligent, actionable decisions.

While these examples were written with new product development in mind, this open-ended approach can also be helpful for more mature companies and products. Again, what you are really looking for are gaps in your knowledge and challenges to your assumptions about the market, customer, and product.

4. Build-Measure-Learn

The customization in the above point doesn’t end at the interview. You will very probably not get everything you want the first time, but by deploying the Lean Startup‘s methodology of Build-Measure-Learn, you’ll get better with each execution. Eliminate ambiguity from questions, beware of question fatigue, widen your sample and do it again.

Crafting your questions is an art. Don’t rush through the revision process, as this can mean the difference between nice-to-have interesting responses, and actionable insight. One common mistake to avoid are simple yes/no questions but code in structural limits on open-ended ones. Common question types include:

  • How do you do [a process, problem resolution] now?
  • How do you wish that process was different/better?
  • When during your day, do you see this as a significant problem?
  • What kinds of workaround do you currently use to address these and similar problems?
  • Why do you use those specific workarounds?
  • What issues did you face with the current solutions available in the market?

5. Analysis

The last step of this process is to design questions so that they can be analyzed easily. Whether quantitative or qualitative responses, you want to create a functional database of information that can be critically assessed and revisited for comparison over time. Treat your customer research project like a form of test.

From the beginning, you will need clarity on what you’re testing for and how you’ll measure whether this particular test was successful or not.


Final Thoughts

Designing customer interviews can be intensive, but it doesn’t have to be complex. Even the experts use the iterative model to build informed hypotheses, get answers, learn from the data and try again.

With just five steps – defining your objectives, defining your audience, designing your tool, mining the data and measuring the success of the tool – you can help create an agile organization that is customer-oriented and well ahead of the competition.


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Paradox Of The Market Share Strategy

Entrepreneurs want to bring their solutions to the greatest number of customers and people possible. Commercially they want this scale to grow, capture efficiencies of scale, and ultimately achieve economic profit.

To achieve the original vision, many entrepreneurs embrace a market share strategy to establish a foothold in the market and scale. This strategy is designed to quickly acquire new customers and users; usually winning customers away from incumbents within the market.

To execute this strategy, entrepreneurs use price early and often. With few other tools to leverage, companies use lower prices, discounts and promotions to entice customers to either switch or at least try the product or service. Once the company either captures enough scale or wins sufficient market share, then the company will attempt to move upmarket through its offering and pricing.

The paradox is that making that transition from a volume to a value play is extremely difficult. The reality is very few companies successfully make that leap, and only after significant investment and time.

One of the objectives of capturing market share or outright leadership in a market is to own their pricing destiny. As former PayPal co-founder Peter Thiel explains in his book “From Zero To One”:

“Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices.”

None of this is to suggest that acquiring and growing market share should not be a strategic objective of a company. The purpose is to point out that companies pursuing market share give away the one thing they are trying to acquire via market share – greater influence on pricing.

If you do choose to implement this strategy, here are four considerations to help guide you and your company’s decision-making:

 

1. Market Share Strategy Is Common With Entrepreneurs and Startups. Differentiation is critical.

How does an entrepreneur inch closer to dominating market share? According to Thiel it is about dominating a small market rather than trying to penetrate a large established market. Put it another way, it is better for a company to be a big fish in a little pond, and make the pond bigger over time, rather than trying to eat up big fish in the ocean.

At the heart of this thinking, is that if you want to win market share, then do so where the pressures of competition are lower; where you can control you value proposition and pricing.

To make this assessment, entrepreneurs need to properly assess the market they are in and want to be in, and the customers they need to win. Unfortunately, many companies have not done this work.

For these companies, scale means competing in an out-sized market and capturing even a small percentage because in absolute terms it can be huge. So entrepreneurs will try to “buy” market share by selling at a low or lower price. While not exactly a price war, you’re one step closer.

The core assumptions and success factors are:

  • The company is aware of the actual willingness to pay of customers;
  • Customers understand and value the product on offer (and link to a monetary value;
  • The company can quickly achieve higher pricing benefits by executing on the unlocked value proposition via sales and marketing.

Truthfully these are large assumptions that even better companies struggle to achieve.

It is one way to gain traction without brand recognition and position the company for future growth. With the right execution of this strategy, but companies often find they’ve ignored the one thing that retains customers for the long-run: value.

 

2. Ruthlessly Manage Value

The market share strategy revolves around several objectives including establishing firm footing in a new market or pushing out existing competitors, gaining scale to drive efficiency, and establishing brand credibility for the future.

The hidden risk of this strategy is that firms create “anchor” prices, either through consistently low prices or frequent use of discounts or promotions.

Value can be diluted through aggressive, sometimes even blind, pricing strategies. Those initial low prices set customer expectations about what they should pay for your product, the value they receive, and how they perceive your brand.

The very best sales executives I have had an opportunity to work with shared the same advice when it comes to defending your value through price: “Never start a conversation with your customers about price. If you do, [customers] won’t hear anything else you have to say about your product’s value proposition.”

Defending value means understanding what that value is worth and patience. It is always easy to decrease price, but a long journey to win the value you deserve.

 

3. Effective Hedge: Customer Segmentation

Talk to a pricing consultant and you’ll find examples of companies embarking on this strategy and failing to translate any of the achieved scale into economic profit or value addition.

Customer segmentation can act as a vital hedge. Unfortunately few companies – particularly startups and entrepreneurs – apply it effectively.

One example is Blue Apron- a leading online meal kit provider. The company built a foothold in the meal kit market with aggressive prices, discounts and promotions. It is untold how much revenue ‘leakage’ Blue Apron is experiencing while implementing promotions and discounts to win customers to retain market share.

While Blue Apron did ultimately IPO, it continues to lose money and has since been displaced by incumbents (e.g. HelloFresh) as the market leader and is threaten by new competitors (e.g. Amazon) in its space.

Bed Bath and Beyond also tried to capture market share with low prices but has failed to convince consumers that the brand can provide more pricey luxury products. Many software as a service (SaaS) companies are using a “freemium” model and will likely face similar challenges. Even B2B companies offering products from workspaces to hardware start anchoring prices with discounts and other incentives. Companies who effectively segment their prospect customer base build corresponding packages and can create an effective “value blend” that drives sales.

 

4. Consequences Based Decision-Making

Seizing market share is only the first stage of this strategy. Figuring out what happens once you’ve established a foothold in the market is critical. Think in terms of consequences. What options are available after we make a certain decision? What options are available after that next step?

This approach is both resource intensive at the beginning and resource-intensive to maintain. This is particularly true in markets where customer switching costs are low.

Here are the questions you and your leadership team need to be asking:

  • How do we convert low-paying customers into high(er)-paying customers?
  • How can we defend price increases?
  • What about our value proposition justifies higher prices and how can we confirm that?
  • How will we respond if a competitor or new market entrant also adopts a market share strategy?
  • If we fail to convert customers to pay higher prices, how will that impact our growth prospects?

This approach should align with your company objectives and the value you offer.

 

Final Thoughts

The purpose of this discussion is not to dissuade you from using a market share strategy, but to encourage thoughtful, strategic objectives and planning to be prepared for what happens next.

There are opportunities with a market share strategy, but there is a very real risk of diluting hard-earned value before you have a chance to stake out your position in the market. As Blue Apron and other companies have seen, it’s more difficult and costly to move up the value chain than down. Taking the time to develop a thorough strategic plan for what happens after you seize market share can truly pay dividends in the future.

The market share strategy might be simple in theory but in practice, it can be very difficult to execute. The strategies that work in securing your market foothold (underselling your competitors, frequent discounts, etc.) actually make it more difficult to move up market. You may sell a lot of units as the low-cost option, but that perception may linger with customers long after you’ve decided to move up the value chain.

If you need help working through these issues, there are great pricing consulting and small business marketing consulting firms in Los Angeles that can help your company develop a foundation for future success.

 

Interested in learning more?
If you or your team is interested in having a hosted session on your pricing straetgy 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.

 

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.

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.

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

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

Is “Good Enough” Pricing, Really Good Enough?

We’ve all been there. Our eyes crack open, look over at the phone or alarm clock and the panic sets in. We’re late.

Slow at first, but you go through a mental checklist to make sense of the situation and a plan forward. You know the drill:

  1. Why didn’t the alarm wake you?
  2. How much time do you have to get to work/school/appointment?
  3. What do you need to do first? Shower? Get dressed? All at the same time?
  4. Enough time to eat breakfast?
  5. …

So what ends up happening? A little of bit of everything and just enough to be where you need to be.

For many companies and entrepreneurs, this perpetual sense of everything due yesterday isn’t new. In the rush and mountain of things to do, so “good enough” often has to do. Pricing usually falls in this category and it shouldn’t.

Pricing is one of those things where having something only ‘good enough’ today, can bite you in the ass tomorrow. Iterating on your pricing strategy isn’t as customer-friendly as iterating on an MVP product, which is why it literally pays to establish a price strategy early.

Below, I’ll walk you through three common pricing approaches and their pitfalls.  Then, I’ll get into the pricing best practices I recommend for start-ups and small businesses.

 

‘Good enough’ pricing approaches

I’m a big Jon Favreau fan (pre- and post-Iron Man) and love food, so when he made the film “Chef” it was perfect match. There is one scene (spoiler alert) where Favreau’s character, Chef Carl Casper, needed to prepare a menu for an important critic. The restaurant owner pushed for dishes with ‘proven’ success. Chef Casper knows this isn’t the best, and itching instead to innovate. Long story short, Chef Casper chooses the ‘proven’ menu and the critic goes on to pan the meal (product) and the restaurant (company).

Good enough pricing is often the search for what’s worked in the face of uncertainty. Good enough pricing is designed to not to lose a deal/customer. The mindset is not proactive (how do win a deal), but defensive (how do we not lose a deal). A subtle but powerful distinction.

The feels right

This is the pricing and monetization model that feels right. It makes sense and there is some data that helps justify the pricing. The model may feel right because it’s a pricing method used in another industry or competitor, or a false-positive validation by the lack of push back from customers.

The follower

You don’t want to rock the boat and get too far ahead (or behind) of the market so you price at or near competitor pricing. The follower assumes the prices used are correct and represents some of the product’s value.

The finger in the wind

No kidding. Some entrepreneurs and companies guess. Sometimes the price covers costs. Sometimes the price makes a profit. The aim is to close/convert the customer. So it’s about finding a price that will get there and as fast as possible.

All three buckets get the job done of getting to a price and winning some new customers. Except there are pitfalls…

 

Pitfalls of “good enough” pricing

Changing prices is hard

In the short-term, good enough pricing can undersell the value created by your product or service. It’s not unusual to hear entrepreneurs say their prices are probably too low, and many more finding it difficult to prove to customers that an increase is justified (especially absent any product improvements).

Moreover, if you raise your prices, customers have a (lower) anchor price to compare against and shape the value perception. When no clear upsell pathway exist, then customer sees the price change for what it is: a price increase.

Culture of bad pricing practices

The tradeoff for the speed and ease of good enough pricing is the lack of planning and processes necessary to price better. Why does this matter?  If pricing discipline is not prioritized, you almost guarantee that you will hurt potential revenue growth. You shoot yourself in the foot just as you’re starting out of the gate.

Difficult managing complexity

The damage caused by bad practices can be relatively contained in closed environments that operate within limited set of conditions. Adding new dimensions such as geography or industry creates complexity that demands a robust pricing strategy. At best, revenue growth is lost when pricing isn’t adapted to the complexity. At worst, new revenue streams are lost because the new product’s price is ill-suited for prospective customers.

 

Doing better than the ‘good enough’ price

Even taking small steps away from good enough into the ‘better’ pricing territory positions the company for future evolution and innovation.

Differentiate features from value offered 

This sounds obvious, but it is not uncommon for entrepreneurs to believe product features are interchangeable with value. This is a painful mistake that goes something like this.

Company: Our product offers features A, B and C that saves costs by consolidating systems and processes. Is this offer value to you?
Prospective customer: Absolutely! We needed something like this for years. How much?
Company: Our solution is $[price].
Prospective customer: Um, ok. The price is steep. What’s the price for just B? Can you take the rest out of the solution?
Company: ….

The exchange above is simplified, but is an illustration on how willingness to pay can differ to the value a company believes it is offering. Not only is it dangerous to confuse each feature as equally valuable, but it is vital to not give away value on those features customers will pay for.

Create pricing defenses

For entrepreneurs using “good enough” pricing, pricing defense begins when you realize you have no defense. Basically your army has been sent out with sticks and rocks, when competitors are coming by land, air and sea.  To avoid this, the following steps are critical in a company’s early days:

Identify what you absolutely need to defend, and be prepared to defend these vigorously.  You’re not just defending a product in entirety, but you’re defending the value customers find in your product. If you don’t know what you need to defend, you’ll be effectively defending against everything which is not effective or sustainable.

Build pricing fences to avoid self-inflicted wounds. It’s hard enough fending off competitors, but you don’t want to value to leak within your customer base. Pricing fences helps to differentiate products and features, while distinguishing offers for specific customer segments. For example, movie theaters offers discounted pricing for either value seekers or customers unable to go to see movies during more popular times. In this instance, time is used to fence these prices.

Identify your best customers, and fight for them. Not all customers are the same and you shouldn’t approach them as such. Some customers will have more lifetime value and others present better future opportunities. Define what you need to achieve, then identify those customers that will contribute most to that aim and build pricing that caters to these customers.

Integrate pricing to the product roadmap

In the short-term, most companies will not be able to release new products or features fast enough to confront challengers. Longer-term it is vital that the product roadmap and pricing work hand-in-hand early in the lifecycle. There are few reasons why it’s important pricing works alongside product development.

First, as the product grows increasingly complex or the product portfolio expands, how each are priced and monetized also becomes complex. Not creating a clear pathway early-on can cause customer confusion, lost revenue and over/under-selling of the product. This last point is important, because if the company doesn’t know if there is willingness-to-pay, a lot of time and money can be spent on something that had no monetizable value.

One example is when a new edition of a hardware product is developed. The new features are clear, but as many customers ask, how much better is the new version. Relative to that value, how will you price the new product versus the legacy. Going further, questions of inventory, discounts and promotions on the older model will need to be determined. Again all pricing questions.

Second, integrating pricing into product roadmap offers a valuable input into the products and features to be developed. This is when senior leaders and product managers can begin answering whether what is being developed is a nice-to-have versus value-adding. Especially when resources are scarce, pricing can help to prioritize development.   

Lastly, working alongside the product roadmap gives a temporary process to test pricing hypotheses to create inputs to make a pricing decision. When pricing is part of the development process then ‘pricing questions’ can be asked to vet the revenue potential and pitfalls. The result can very well be not to monetize but the product is of such value it must be developed. Having this process can make that decision rather lose time on the backend or attempt to monetize and then having to retreat from the decision.

Like a retailer who projects how a new product will fit into its range – pricing, customer-fit, etc. – entrepreneurs need to plan how new product development and pricing will fit into the overall architecture. Starting early in the product roadmap is vital.

 

Final thoughts

Good enough pricing, isn’t good enough. Too often we are victims of being rushed.   It doesn’t have to be this way. There are steps to take to upgrade good enough pricing and a few have been shared here. Entrepreneurs and companies looking for long-term success need to build their pricing roadmap. Just as in product development, processes and planning must be developed that are sustainable and adaptable to achieve the company’s growth ambitions.

 

Interested in learning more?

If you or your team is interested in having a hosted session on your pricing and monetization model, please contact us at: contact@helloadvisr.com

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

Why Better Pricing Builds Company Value

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

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

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

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

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

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

 

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

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

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

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

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

 

Operations: Pricing shows how the company is organized and executes

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

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

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

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

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

 

Leadership: Pricing shows how company leaders make decisions and executes

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

– Warren Buffet, Chairman Berkshire Hathaway

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

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

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

 

Final thoughts

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

My response? Is it absolutely relevant.

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

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

Interested in learning more?

If you or your team is interested in having a hosted session on your pricing and monetization model, please contact us at: contact@helloadvisr.com

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

How to Prevent Your Growth from Going Flat

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

Great job! So what’s next?

Don’t let growth go flat

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

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

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

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

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

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

Be relentless about your value proposition  

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

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

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

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

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

Identify capability gaps to monetization and pricing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Final thoughts

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

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

Interested in learning more?

If you or your team is interested in having a hosted session on your pricing and monetization model, please contact us at: contact@helloadvisr.com

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