Wednesday, April 20, 2011

Lesson #20: Setting Product & Pricing Strategy For Your Startup

Product and pricing are two of the four big "P's" from your Marketing 101 class.  Your startup will never succeed if you screw up your product/service offering or pricing strategy. 

When setting your product or service offering, you must first do an in-depth study of competing products and services currently in the market place and set a plan on how you will differentiate yourself.  When I was at iExplore, we differentiated on the basis of offering adventure tours, compared to the big online travel agencies selling air, car and hotel reservations.  And, versus other adventure travel companies, we further differentiated based on offering customizable tours leaving on any date versus the normal packaged group tour leaving on set dates.  Given the clients a lot more flexibility in designing their dream itinerary around dates that worked best for them. 

What is going to make your product or service different or set you apart from your competitors?  Is it a core ingredient (e.g., veggie burgers vs. beef burgers, cherry vodka vs. plain vodka)?  Is it a core upsell (e.g., free fries with any burger order)?  Is it a faster technology or more efficient crowdsource?  Is it some feature or functionality that sets you apart, like a past customer reviews database to given clients more confidence in their purchases?  Without a unique differentiator, you are just one of many companies trying to push your story uphill.  The downhill comes with that eureka moment when the customer says, "wow, that is really different and better than what I am doing today".

The perfect example is Google's search technology.  They were not the first search engine to the market, there were several others like Excite, Alta Vista, Inktomi and Lycos.  Remember these guys?  Probably not.  So, how did Google take over the search business?  With a better product!!  When people searched key words, they actually got very relevant results that quickly took them to what they were looking for.  And, how did they do that?  With a new technology that studied the backlinks of third party websites linking to those pages?  If big Expedia is linking to iExplore for "adventure travel" terms, iExplore must bet pretty important for "adventure travel", so let's move them up the list of results.  Or, if 1,000 people are linking to a site using the same keyword, they must be pretty important for that keyword, and more important than the site with only 10 people linking to them.  And, the rest is history as Google's quickly dominated the world wide web.

But, product is only part of the offering; price is the other key driver.  If you are not offering your clients a substantially better value than current solutions, you might as well pack up your bags right now.  At iExplore, we not only offered a unique product in the market, as described above, we offered it at a price point 35% lower than similar products in the market (the exclamation point behind an already terrific product offering).  And, at my other business, MediaRecall, our entire value proposition was largly around price (and speed).  Why spend $10MM on your project, when we can do it for $1MM (in a fraction of the time)?

In determining the right price for your product/service, the first thing to do is see where competiting products are priced today.  And, then set your prices at a material discount, at least to start, to get the attention of your prospective buyers.  If customers are currently spending $150 per hour for a certain service, and you can offer than exactly the same thing for $50 per hour, who isn't going to listen to that pitch?  You are going to save them a ton of money, and make them look like a genius to their boss.  The percent discount is largely driven by the difficulty of market entry in that industry (e.g., big entrenched Fortune 500 competitors), the quantity of competitors (e.g., 100s of companies vs. a handful), and obviously, your cost structure that can profitably sustain those prices. 

Shoot for a minimum of 33%-50% savings versus current competitors, to have a reasonable chance to get the attention of your customers.  Unless you are in a very consolidated industry with a handful of players selling a high frequency product, where a 10%-20% savings could mean a material improvement to their bottom line.  And, if you are a techology or software company, remember you are continually dealing with a "buy vs. build" psychology of your clients.  For SaaS models, price your product (on an annual basis) at 10% of the equivalent "build" price for clients (getting them 10 years of outsourced value for a product that you will continually improve vs. 5 years of built value for a static product they build themselves).

And, on the world wide web, prices are often moving to FREE, with alternative ad supported revenue models.  Why do you think all the newspapers are going out of business?  Because people do not want to pay for day-old content that a user can now find up-to-the-minute on the internet for free.  Why do you think the music industry has been struggling?  Because people do not want to pay $14.99 for a whole album of songs, when they can simply buy the one track they like for $0.99 on iTunes or find it for free on any of the file sharing services.  This trend is particularly true for mobile apps.  In my opinion it is better to offer it for free, for some period of time, to build up mass user adoption and word of mouth, and then implement your revenue model later.  That is exactly what Google, Twitter and Facebook did, and we all know what happened to those companies, dominating the web..

Anyway, product and pricing are complicated topics with tons of variations you can pursue.  But, most importantly, start with your best offering, as it is very difficult to change a customer's first impressions down the road.  Good luck!

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2 comments:

lowkeydad said...

George, what about the instance where you are offering a product that does more than competitors at a small discount? Do you still think a 33-50% discount is needed? Also, what about the psychology of offering something at such a steep discount? Doesn't it also "cheapen" the product or service in the end?

George Deeb said...

Both excellent questions. And, as I said in the post, there is no one right answer here. If it was an apples-for-apples product, 33-50% will certainly get buyers attention. But, if yours is a materially better product, a much lower discount (or even the same price), may make sense. As for cheapening, the product based on a deep discount, the reaction will vary on a product by product basis. If a luxury automobile is 33-50% less, customers may be nervous in comparison to other luxury cars, in terms of quality. If it is a simple "nut or bolt" product, a deep discount won't scare anyone away. Hope that helps.