In the first few weeks of each year so-called experts are listing top trends for their respective industry. In most cases this is misused as a simple Hello World, we’re still alive! backed by little to no research.
On the contrary, Simon-Kucher & Partners recently published their top 7 pricing topics backed by the opinion of 1,600 top executives. Originally targeted at established companies, pricing4startups took the initiative to transfer these trends into your setting as a founder or an early-stage startup. Fortunately I received great support from Jonathan van Spijker Baan, a Manager at Simon-Kucher’s Amsterdam office.
Trend #1: Pricing power as a new leadership priority
The study revealed that 80% of all execs are feeling an increase in price pressure. Very often this pressure has built up due to disrupting business models, new technology and digitization. Ideally your company is reason for these headaches.
The study also found that only 1 in 4 established companies has great pricing know-how. The bad news is that this will look much worse in the ventures world.
Successful companies will involve their board when it comes to the topic of pricing, at least on a strategic level. Looking at your venture, either you as the Founder or one of your Co-Founders has to take responsibility for the pricing strategy and operations early on!
Jonathan puts it this way: “For established companies board level involvement is crucial to achieve gains that in many mature industries are not more than a few percentage points profit improvement. An early involvement of the founders is much more critical: it could make the final size of your company several times larger than when not giving pricing the required attention.”
Trend #2: Pricing innovations successfully
The study results show, that innovation in products and services are the only way to overcome price pressure. The major pitfall for most organizations is that innovative products are jeopardizing existing product revenues due to the risk of cannibalization. While this might not be an issue for your venture, attaining your profit targets is.
The magic lies in synchronizing a product’s value, it’s cost, price and volume in order to achieve maximum product market fit. In case you haven’t fully grasped the concept of product market fit, Alex Schultz, the VP of Facebook, fully elaborated on this topic in his Stanford lecture and Tom Fishbourne gives great visual support on a regular level.
In the early stages of your product development, especially if you’re in tech, keep these 4 items always in sync by gathering customer feedback at the end of each development cycle.
Fortunately for you if you understand your product’s value to the customer, price setting becomes much more simple. For a practical example check last weeks post on StoryHome.
Trend #3: Reinventing your pricing model
66% of the study respondents thought of changing their price model. Typically there are two reasons why this is happening:
- Create intransparency to disallow for direct comparison of competition prices
- Align with the customer expectations on what is driving your product’s value
Which of these routes would you take?
When thinking about your price model, the customer should feel that your pricing is reflecting her understanding of your product’s value. Within the last decade new price models have been established across industries. Especially with the development of SaaS models, new price metrics became widely implementable.
A great example for this development is Hetras, a young Munich-based company. They developed inventory management as a service for hotels and thereby allow for them to manage and sell their rooms on their across platforms such as booking.com as well as on their own website. For most of their services they charge a €-amount per room. This results in great transparency and fully resonates with customer’s understanding.
At the same time usage-based pricing models have been introduced to new industries. Rather than buying a car or renting it on a daily basis, new players such as Car2Go and DriveNow are allowing for renting cars based on the exact usage.
Creating a sound pricing model is certainly challenging, especially when doing it for the first time. In general you have to consider the four structural elements:
- Price metric – what you are charging for, e.g. price per minute for car sharing
- The reference base – how is it done today, e.g. the full annual price for possessing a car
- Bundling – what can you add to a package a customer wouldn’t buy into when priced separately, e.g. a sunroof as an accessory or the child seat for the shared cars
- Debundling – what can you price separately and take out of a package, e.g. the insurance package
Trend #4: Making omni channel pricing work
Among others the internet massively improved our way of finding and purchasing great products. An increase in transparency is a blessing to customers but can lead to major headaches for consumer good companies.
Consider the following example: When I looked into buying a new pair of sunglasses from Oakley’s in 2012, I had the choice to buy in Store at the recommended retail price of 209€ or choose a random online store and only pay 149€. I made my choice and bought online.
What about the customer buying his shades at 209€ and finding out about the 149€ price only after the purchase? Having prices all over the place will create unhappy customers and can hurt your brand reputation pretty badly.
Talking to an in-Store Oakley sales rep, it became obvious that this was a big issue back in 2012 and that they have been intensely working on harmonizing pricing across channels. Even 2.5 years later this problems has not been solved. Looking at one of their latest product the problem has improved at all. Simply googling reveals the first-best store selling it at a 32% discount.
The major learning for your venture is to incorporate all sales channels with your pricing strategy and operations from the beginning. This will allow for higher profitability and supports your desired brand image.
As Jonathan highlights,”Omni-channel pricing is all about giving discounts that reward behavior that suits your own company’s goals and targets. Obviously we are seeing a great shift towards online shopping, but do not underestimate the benefits that offline channels may provide to your customers.”
Trend #5: Structured value selling
The study found that procurement processes became much more professionalized than the sales process during the last few years. When selling to larger enterprises chances are high that a procurement department will get involved in order to slash your prices, which is often becoming a huge entry barrier.
This is one of many times when value selling comes in. Rather than making a deal at any price you as a founder (in case you do the sales) or your sales rep in charge has to know the value of your product by heart and rather walk away from a deal than selling at a negative margin. Take this rocketwatcher.com story for a great example.
How to do sales successfully is an art on it’s own, but a lack of preparation is largest enemy of a value-based deal!
Trend #6: Smart price perception management:
How are you perceiving price? Obviously 4.99 is cheaper than 5.99, but Simon-Kucher highlights 4 alternate drivers than price level for influencing price perception:
The offer structure is looking into the product features, functionality, parts, service and the way these are bundled. The opposite of bundled offerings are rate cards, which are very common in B2B products and services. A ‘great’ example is SAP’s price list. Granted that SAP is doing an awesome job on other dimensions, but this is obviously a bad example. You might think that new ventures wouldn’t follow into these footsteps. I was dumbfounded when looking at Pure Storage’s price list, a hardware company founded in 2009 and valued at more than $ 3bn. The pricing doesn’t look that much different from the company founded in 1972. You should take the high road and create customer-friendly bundled rates rather than listing hundreds of price points.
As stated in Trend #4, the price metric is of great importance and one of the a primary factors for price perception. Larger organizations tend to alter price metrics in order to make a direct comparison towards competition and former internal prices difficult. Rather than creating more intransparency you need to keep the customer’s point of view in mind!
When looking at the communication of price and product in established or commoditized markets, the price point or discount level very often plays a crucial role. Rather than communicating a low price point, take the value of your superior product as a leader for communication. Especially for startups this must be possible. Take the Apple store for an example and have a look at the size of their price tags.
The fifth important factor for price perception coming from the survey is the moment you’re showing prices to a customer in his journey. Depending on your target segment the perfect timing will vary. For most startups winning the initial sale will be the biggest issue at hand when looking at the full customer lifecycle. Therefore apply A-/B-testing or talk to your initial prospects/customers to determine the right moment for showing prices.
Trend #7: Price increase campaigns
The study revealed that most companies struggle with price increases. On average only 36% of price increase targets can be realized. For startups this might seem like a luxurious problem, since you have to have a set of customers whose prices you are able to increase.
At the same time keep in mind that your initial customers might have gotten an inferior product compared to the next version. This translates into two actions based on your offering:
- In case you’re selling physical goods, make sure you are thinking about price increases for new customers on a regular basis depending on your development cycle
- In case you are selling services, next to increasing pricing for new customers, consider raising prices for your existing customer set, if value increases for them.
IN SUMMARY: Your Top 7 Pricing ToDos for 2015
- Get involved early with the pricing topic on the founder level!
- Rather customer feedback early on to determine your product’s value and derive willingness-to-pay!
- Create a pricing model that resonates well with your target customers!
- Consider cross-channel pricing from the start in order to avoid frustration later on!
- Train yourself and/or your sales folks in value-selling!
- Find out about the importance of price in the buying process and create communication accordingly!
- Review your prices on a regular basis and implement them with new customers as well as your existing customer base!
A big thank you goes to Jonathan for supporting this initiative!