1 – Know the value you bring to your customer
2 – Understand your customer’s business model
3 – Test it until you make it
If you consider expanding in the US, pricing should be a cornerstone of your US strategy. Your costs will probably skyrocket, but you usually face a market with more purchasing power.
Countless articles, thoughts, and talks, glut the web on how to price your product. However, most entrepreneurs don’t know if their pricing is ambitious enough. You do not want to price yourself out of the market, nor to undervalue your product. For all these reasons, we’re sharing our best practices learned in the past, as entrepreneurs, investors and strategy consultants.
Contrary to the theory, a price should not only be a result of an economics problem. It represents an investigation challenge and reflects your capacity to understand real value.
According to the excellent paper of well-known investor Michael Dearing,
“Companies fixate on the gap between their production cost and their price, instead of focusing on the gap between their price and the value customers think they deliver, a concept known as real value and perceived value. ”
Example of how a company could multiply its pricing
Let’s take an example with a very promising startup that develops and produces a unique range of optical components. Its solutions transform the optical fiber performance, and thus increase the capacity of existing infrastructure. By applying the perceived value model, the founders realized that aeronautics were the most relevant application with the highest return on investment.
Every day across the globe, the equivalent of the entire population of Switzerland travels by plane. Global air transport currently represents 3 billion passengers per year and keeps growing. This passenger growth and the rising new services and connected equipment affect the on-board data transmission system.
In order to define its pricing, the company spent hours with customers and technicians, asking numerous specific questions about their business. They eventually came up with their breakthrough value proposition. Their solution enabled their customers to save dozens of kilograms of power cables. And for each saved kilogram, airplane manufacturers were saving the equivalent of millions euros in the lifetime of every plane.
Initially, the pricing strategy was fixed on the margin structure of the distribution network and their products cost.
You easily understand that the company immediately multiplied the pricing point, to base it on the REAL VALUE. To contribute to high pricing, they have built a strong brand content strategy to empower the PERCEIVED VALUE.
Every stakeholder in the value chain was happy, starting with Airplane manufacturers who demonstrated a quick Return on Investment to their board.
→ ASK QUESTIONS, AGAIN & AGAIN
We highly recommend to spend time on your customer’s business model, its structure, the power balance between players in the value chain (both providers and customers), the margin and the capacity to absorb your price.
Let’s take an example together.
Company FunnyCart has invented a coloring book that turns into an animated cartoon thanks to a playful and unique mobile application for children and families. FunnyCart sells its solution as an entertainment and marketing goodies for chains of restaurants. It’s a great way to encourage children to be creative while procuring quality time for parents.
FunnyCart business model: content production fees + licensing depending on the number of stories
- Traffic: Attracting parents with kids in the restaurant
- Revenue: Enabling parents to spend more time and money in the restaurant
- Brand awareness: Building and expanding the brand awareness off-site as kids pursue their experience at home
In order to help FunnyCart define its pricing we at big bang factory needed to understand the business model of a franchiser of a chain of restaurants. Our first objective was to assess what percentage the Chief marketing officer of the franchiser was able to spend for this offer compared to his global communication budget.
In order to do that, we had to assess its global communication budget.
So, we ASKED QUESTIONS, listened carefully and filled the table below.
By playing with scenarios, we realized that FunnyCart’s solution represented 30% of the marketing annual budget of a franchiser which was above they could afford, especially for a first collaboration. This enabled us to revise the pricing.
→ PLAY WITH SCENARIOS & be humble
Now that you have a preliminary price point, you need to test it!
We love Madhavan Ramanuiam, a board member at consultancy Simon Kucher & Partners, who’s managed 125 pricing projects for companies ranging from rising startups to the Fortune 500. According to him, you have to test your customer’s Willingness To Buy, he’s talking about WTB concept. These techniques consist in asking someone if they like your product before asking them if they like it at a price point. Ask at the onset whether or not your client would pay for your product.
Starting with questions is powerful because customers won’t be in the mindset of negotiating price, but they will give you objective and useful feedback.
What about a SURVEY ?
To find out what their psychological cliffs are, we suggest that you start with these very simple questions on a small group of your buyer.
- At what price would you begin to think that our product is too expensive to consider purchasing?
- At what price would you begin to think that our product is getting expensive but you still might consider purchasing it?
Watching out what customers find acceptable, expensive and prohibitively expensive gives you a graphical view of their ability to pay and allows you to identify “price cliffs”. Once you find the cliffs, work on your brand power to contribute to high pricing and test it for a couple of weeks. It’s a real teamwork with your Sales Development representatives, your marketing team and the VP of sales.
→ AND DO NOT FORGET: TRACK IT like the oil on the fire
You need more than just numbers and spreadsheets to build your pricing strategy. Pay particular attention to behavioral and revenue data and compare that data over time, deciding how often you want to test. Compare the cohorts and focus on revenue, engagement and retention.
The ball is in the court.
If you start selling in the US, you should absolutely know the logic behind your pricing strategy (more than a pure EURO-USD conversion!). If you need help, just contact us for a free mentoring session on your pricing!
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