TL:DR
- Pricing is strategically important, which is why the CEO is the decision-maker for more than 3 of 4 companies in a study we conducted.
- Those CEOs also know pricing is not a core competency or skill set their company possesses, making revenue benefits from pricing difficult to achieve.
- CEOs do not have the time to learn and level-up on pricing’s many approaches and nuances.
- Rather than attempting to tackle pricing internally on their own (or worse yet, do nothing at all), outsourcing pricing can generate a much higher impact for companies even at the earlier stages.
CEOs know pricing is important. Strategically important. It is why for more than 3 of 4 companies, the CEO is the pricing decision-making for their companies.
Yet most CEOs oftentimes have limited to no experience in pricing. From pricing strategy to building pricing models and setting, to testing and management, very few CEOs are actually trained to build and manage the pricing that fuels the business model.
In fact, when we examined the world’s top business schools, less than 2% of the required curriculum had even an element around pricing. Usually, pricing fits into a single module within a marketing or microeconomics course. 1 to 3 hours to learn how your company will position its products, win customers, and help the company win a sale.
This is very little preparation for a key function of running a business – determining the price that will sell a product and make the company revenue.
Unless you have a pricing expert on the founding team, outsourcing the pricing work can be an alternative approach to managing to price. This can enable companies even at the earlier stages to effectively use pricing to accelerate revenue traction, build the price management structure to take forward, and most importantly defend the value created by your company’s innovations.
In addition to direct revenue and profit benefits, there are additional benefits to outsourcing the pricing work:
- Save months (or years) in lost revenue (e.g. money left on the table) from each hard-won customer.
- Save in the costs of hiring pricing professionals to bring in-house.
- Bring a diverse outside perspective coming from the work they do with different clients, industries, and situations.
- Eliminates the need to onboard and ramp up before benefits from pricing can be realized.
- Access the latest thinking not only in pricing but successful go-to-market ideas across industries and geographies.
Don’t Go It Alone (Really, Don’t)
Unless there is an expert on the leadership team, do not try to hack your way through these four areas of pricing (or worse yet, do nothing at all):
1. Strategy
Founders want – understandably – the price level. Should the price be $9.99? $10.50? $9,999?
The rush to get a price without a pricing strategy can miss out on vital opportunities. Not only does a strategy help to define the right pricing models to help your startup to achieve desired goals, but will also help create better decisions on what price levels should (and should not) be applied and when.
Creating a pricing strategy is more than a mission statement for the future, but a data-driven process that looks across the business – business strategy, marketing, and sales – to define the path forward to win the right customers that help achieve the right objectives for the company.
2. Pricing models
Every founder has Googled [insert their industry or product category] and “pricing model”. That is certainly one way of figuring out how the company will price. But this approach misses the complexity of not only identifying but building the right price model for the products customers are offered.
Designing a value-based pricing model is a structured process. The process evaluates many elements including customer segments and buyer personas, value metrics, promotions and discounts, and testing. Few small teams can afford their own professional to manage all of this work, and even fewer teams have extra time to reallocate to do this necessary work.
Too often companies will adopt the “standard” pricing model but can find themselves either forcing a circle into a square peg or losing customers because the pricing model does not sufficiently help to differentiate it from its competitors.
3. Price setting
Optimizing the price is where all companies want to get to, but the path to getting there is more complicated. Pricing is a lot like cooking – two chefs can be creating the same dish but the ingredients they use, the cooking methods used, and the ultimate product created can vary in appearance and taste resulting in very different outcomes and reactions.
For companies there are decisions to be made on the inputs to use then there are the tools and methodologies used to build price recommendations. Then there are the additional strategic and tactical considerations that a company’s leadership team must take into consideration when making their decision. Perhaps the most important step to realizing the benefits of pricing is in the execution and how best to take the pricing to the market.
4. Internal price management workflow
For many companies, pricing is a “set it and forget it” activity. It was hard enough to try and figure out pricing the first time, so why go through it again.
But as many teams discover the work of pricing never really ends. The lack of a pricing management workflow not only increases the time the team must dedicate to responding to new pricing events. Without a clear process to start can result in hacking their way to suboptimal price decisions that leave money on the table or lower conversion because the pricing does not align with their customer’s willingness to pay.
Some examples of pricing events throughout the year include:
- From a competition standpoint, key competitors can change their pricing or offer discounts.
- The company can be working on new features that make the product “better”, and need to price this into its offer.
- The company is developing and launching a new product and must determine the pricing for the new product AND figure out how the new product’s pricing will fit with the existing product lineup.
- The company’s revenue and profit expectations change and opportunities must be identified.
- …
Final Thoughts
Every startup has to price, but the reality is very few actually work on pricing. The main challenge is they can not cover all the bases along with the resources and experience they have.
In order to compete and accelerate growth, companies have to take a proactive smart approach to price. Not doing so is costly not only to the bottom line but to the ultimate success of the company (poor pricing is cited as a top 5 reason for startup failure). Outsourcing pricing is a great opportunity to figure out what the monetary value is (pricing) and how best to take this market. The alternative is leaving money on the table (and company growth) and confusing customers on the value proposition.
Do you outsource different functional areas in your company? How can outsourced pricing help your company grow? Let us know what you think!
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