Among the many challenges faced by entrepreneurs and innovators is the subject of pricing for something new. The only thing that is for sure is this: however you charge for your service or product, the first objection will coincide with your first sales call. Let’s look at two well-known business models that started out wrong to see what we can learn.
When mobile phones became widely available (pre smart-phone era), manufacturers like Motorola expended considerable energy and creativity to design and manufacture better devices. The problem was that the carriers lumped the devices into the contract, so the cost of the device was not readily apparent. The device manufacturers realized this, and complained bitterly that their value was being buried beneath a laundry list of carrier fees.
For those of you who have recently purchased a new iPhone, you’re (ahem) well aware of the cost of the device. The device manufacturers are now in a better position to create value and charge for it.
The banks, on the other hand, came up with the idea of “free checking”. A colorful professor I once had would occasionally shout out the acronym “TANSTAAFL!” in class, which mean There Ain’t No Such Thing As A Free Lunch. What it lacked in poetry, it made up for in veracity. As the banks should have known, there ain’t no such thing as a free service.
But the banks built the lie upon the backs of NSF fees and the like, so now that those fees have been given a radical haircut by new regulation the banks are in a bind. After all, they’ve spent decades convincing us that checking accounts are “free”. What now?
We’ll leave them to their trouble. The key for us is to think about how to attack pricing when we’re getting started with something. A few ideas:
If you give it away for free, people will attach no value to it. This is a tough thing to undo later when “free” doesn’t pay your bills, and when the customer has been trained (by you) to believe your product is of little value. Remember: market validations built on the back of sweetheart deals for early users isn’t very good validation. What is good validation is if someone will pay you for it at your target price.
Lead with an ROI model. The way companies make purchase decisions is fraught with spreadsheets, multiple levels of managerial approval, and burdensome procurement and compliance challenges. You can either complain or prepare. Go into your deals with an ROI model that the customer can participate in. If the numbers look good, then you’re off to a good start. If they don’t, you get data from their ROI to refine your model.
No plan survives contact with the enemy. As my co-workers can attest, this is a favorite phrase of mine (among many), and it comes from my military experience (for related posts, go here and here). It’s an old phrase that is self-explanatory. When the fighting starts, most of your planning goes out the window. So be prepared for people to make sour faces when you get to the money talk, and assuming you’ve done some work to understand the cost drivers (see ROI point above) then stand your ground and sell your model. Remember – the salesperson’s job starts when the customer says “no”.
As for funding your company, that’s a topic for another time, but I believe in getting customers to fund a company as much as possible, so found this book interesting. I’ve not read it, but there are more ways to skin a cat these days. Not every company needs to run to VCs for funding.
Postscript: Regarding my use of the idiom “skin a cat”: One of my daughters was in her freshman science science class in high school when her teacher used the phrase. Her demographic was evidently unfamiliar with the phrase, leading semi-alert students to bolt upright in their chairs and react with horror. I’m not sure the phrase will survive her generation…..