Be strategic and don’t make this common Founder mistake (when it comes to pricing)
Eight months into the lock down, I finally relented and decided to purchase a larger desk. I did want some features like real wood, lots of drawers and filing space and of the same finishing as my home office furniture. I found a very expensive desk at Williams Sonoma. I had no limit to my budget. I was willing to pay any price.
Shipment was delayed multiple times, for multiple months with supply chain constraints and inclement weather. I not only was fine with paying top dollar, but I was also willing to wait, since I had my heart set on the specific beautiful piece of furniture. When looking back on the transaction, my purchase decisions mostly came down to the fact that there were virtually no substitutes at that time.
I love my new desk, and if I had to do it again, I would probably even pay more. The lesson here is that pricing plays a key part in market demand for a product, whether it’s a desk, or something that your company offers. When you really understand the customer and the journey they go through, you can discover what price is right. Get pricing right and you will scale, get it wrong, and you may fail.
Why pricing is everything when scaling your company
Founders in my experience don’t spend enough time thinking about pricing. Of the four marketing Ps Pricing; Product; Promotion, and Placement; Pricing is the most strategic.
The price someone is willing to pay for something may be quite different from someone else.
Say that again.
The price someone is willing to pay for something may be quite different from someone else.
Say that in other words.
Think about my experience buying a desk during lock down. I paid a pretty penny, and I am certain I was not alone.
We were all willing to pay more due to circumstances. Enterprise customers are not dissimilar to persons like you and me. They are people. And how they feel about pricing, can make or break your business.
Thinking and acting strategically about pricing
How would an economist answer the question “what should the price be?”
An economist would reply, “It depends.”
A professor of Microeconomics 101 would, with chalk in hand, draw a supply and demand graph with price on the vertical axis and quantity on the horizontal axis. She would draw a downward sloping curve (in almost all cases and assuming all other determinants of demand are held constant, such as income, tastes and preferences, and the prices of substitute and complementary goods). An upward sloping curve representing the supply at which supply is determined by marginal cost: firms will produce additional output if the cost of producing an extra unit is less than the market price they receive.
Prices are set at an equilibrium point that I like to call “willingness to pay.”
You will have to do heavy lifting to understand the customers’ purchasing journey – at first.
The time dedicated to gathering data points to understand the price(s) at which the customer is willing to buy your product is well spent. A strategic pricing process helps to build on the intelligence in the business decision making to continuously seek a higher willingness to pay. This process contributes to winning business models and more profits.
Your business model was inspired by another business model (substitute for your product)
In the intake form I ask founders “What business(es) or CEO Entrepreneur do you most admire; who inspired your business idea?”
The answers I get are unsurprisingly consistent. They usually share a story of a product or a service that they were dissatisfied with, sharing that it sparked inspiration to fix the problem.
Most had already been a customer of that product in the first place.
New business models are up against the incumbent business model. And there are floor prices /base prices to doing what your business does. When researching the right pricing for your product or service, you can start there.
Then, ask yourself two simple questions to discover your strategic pricing process.
Q1: On a scale of 1-5 how important is each feature (provide a list of features) (5 being most important)?
Q2: With the same features list, how willing is your customer to buy those features? (Very 10 and not at all 1)
This simple exercise is very powerful in discovering price points and uncovering added features for future product development.
Three pricing models examples
To help this process come to life, let me share three examples of pricing strategies that embody real world examples of how to think strategically about your price vs. incumbent business model prices.
- Geographic Market Model in renewable energy
- Standard of Care Model in healthcare
- and the Stickiness Model: Enterprise SaaS Model
Geographic Market Model: Infinia Corporation
Renewable energy pricing mechanism is about Levelized Cost of Energy (LCOE) – what is the grid price for electricity?
While simplifying– the primary reason is that the grid price for electricity is different depending on the geography and the secondary reason is incentives/subsidies of different sorts. Solar products like photovoltaic panels or concentrated solar power are priced differently based upon the country/region/ where they are sold.
To illustrate, there are differences in geographies between the US vs. Spain where I lived and worked for many years. In the US there are abundant resources, particularly oil and gas, coal, and renewable energy (Lots of supply). Spain runs systemic trade deficits due to high imports of fuel and high added value goods. Spain is what economists call an energy island with very little traditional energy resources including coal, and solar and wind.
In Spain for my 570 sq. feet flat that is unoccupied for nine months a year – the electricity bill for the period between March 29 to May 30, 2017 was €108.42 Euros or $126.5 USD. For the same period for a house of 1100 sq. foot on average that is occupied by me I paid €61.16 Euros or $71.56 USD.
The meaningful numbers to evaluate the different electricity costs are kWh (Kilowatt hours) for delivery and generation charges: California delivery charges are $0.08291 kWh and $0.07477kWh respectively. In Spain €0,116968 and € 0,135854. Additionally, in Spain a surcharge to subsidize the renewable energy sources and tariffs from a very generous feed in tariff scheme grouped under “other regulated costs.”
In California there is a rebate derived from the cap-and-trade market incentives to reduce greenhouse emissions – I received $6.15 back in my bill.
Evaluating pricing, incentives, rebates, and subsidies for regulated industries, such as renewable energy, can inform early pricing models.
Standard of care pricing model: Lug Healthcare
Healthcare technology pricing mechanism is driven by Standard of Care: a current scientific and clinical approved treatment path. For the outpatient treatment of patients receiving chemotherapy – requiring individualized treatments the margin for error is high and the cost of drugs is high. While addressing the tradeoffs between safety-efficacy-affordability, in some markets you have reimbursement codes and other markets you have reference-based pricing and on and on.
“Lug Healthcare technology developed a first in class individualized cytostatic treatment, with safety and traceability from manufacturer to hospital to patient including a bedside app for the nurses administering the treatments. The result being: No adverse reactions or deaths from medical mistakes in treatments and a 20% savings per year in hospital procurement of cytostatic drugs.”
The price decided on was an annual subscription for the software based upon treatments and a % of savings in the hospital budget for the cytostatic drugs. Again, an example where you are looking at existing systems, to help better understand your customer journey, to help determine the best pricing. Are there industry standards that you can look to in your research?
Stickiness Model: Enterprise SaaS Model: Qualtrics
Initially software as a service (SaaS) was what we used to buy in a box and now is provided in the Cloud. I remember CD-ROMs so please don’t hold this against me ☹ . These days when you buy a new PC, you will likely have an option for a yearly subscription to run the software you need. And just when you think you are going to cancel the free subscription, they offer a second year for the basic package for just $24.99 because they have enough buyers on the platform that are willing to pay.
So, the customer journey begins at free to basic, to premium to enterprise. And on and on …
This is again, an example of how understanding purchasing behavior can help you plot units on a Supply and Demand Curve.
Qualtrics sells business intelligence software and has created multiple millionaires when SAP purchased them in 2019. The secret to their success came from learning their customer journey, they had a “forever customer” – a market of PhDs and academics using the platform who are really smart people and when they left academia they took the software to their next workplace.
Ryan Smith CEO of Qualtrics shared, “We had a goal always that we would only go into a product (vertical) where we can be number one.”
He continues, “I too was like any other entrepreneur, always wanting to go outside of the box. My brother kept me focused, and after 2.5 years, we had 18 million in revenues, and 250 academic clients. When we reached $30 million run rate, we were able to pivot from academia to enterprise customers with a higher price point.”
How they did that was certainly informed by a strategic pricing process by using their own software, Qualtrics Research Core, to survey their customers.
Thinking and acting strategically about pricing does not have to be a heavy lift for you. But if you want to thrive, it does have to become part of the planning process as you build your business.
If you are a founder and are wanting to grow not only your revenues but also your bottom line, or are in the process of changing your initial launch price, why not book some time with me? I enjoy stepping founders through this process, to set them up for success.
Brenda A. McCabe
Founder Next Act Advisors