Why you shouldn’t use your competitor’s pricing as your benchmark?

This is a guest post by Grishma Govani. Grishma builds and grows communities at early stage startups. She focuses on growth and customer retention by way of word of mouth, analytics and user behavior. You can find her on twitter as  @StrangeLoops


As entrepreneurs, most of us have studied our competitors thoroughly at least twice: once before we start building a product and once before we set our pricing. Before we start building a product, we gauge the market by understanding what products our competitors are selling, where they are lacking and what their customers are unsatisfied with. When it comes to pricing, most of the time, we wait until we are almost ready to ship our MVP.  At this stage, we tend to price our products proportional to the amount of value we are adding over our competitors.

For example, if we believe our customers will save time by using our product over our competitors, we will calculate how much time we are saving our customers. We will also try and understand how much that extra time is worth to our customers. The more time our customers save, the more value our product creates leading to a higher price point.

 The problem with this pricing method is it is a very short-sighted strategy. By using our competitor’s price as our benchmark, we will completely miss seeing all the new ways our product can possibly provide value to our customers. The portable bar code reader was one such product. The company that first made them used their competitors as benchmark to price the reader. They priced their product proportionally to the amount of time they were saving customers over their competitors. But they missed understanding how else they were adding value to their customers by completely allowing them to redesign their supply chain and logistics. Comparison pricing led them to undervalue one of the most innovative products in the market.

One effective way to address undervalued pricing is to get a full picture of where you plan on adding value even before you start building the product. You can start by mapping your customer’s minimum expectations and your competitor’s performance on the following three scales – product performance, operation/cost excellence (price) and service/community as shown in Dr. Barbara Kahn’s chart below for leadership strategies.

strat_lead

Based on this map, you can design a product strategy to add superior value on one of the three scales where customer’s expectations are high but are not being met. You, also, need to make sure your product is good enough on the other two scales too. This will form your hypothesis for a market strategy which you can then validate.

Evaluating your product along these three scales is a great way to understand value pricing while you solve actual problems your customers will pay a premium for.

Further Reading:

Read how a very innovative portable scanner completely missed the boat on pricing when they only looked at their competitors’ prices. Also, it gives an in depth look at how to develop your pricing. (http://www.mckinsey.com/insights/marketing_sales/pricing_new_products)

Here is a good article on why entrepreneurs are bad at finding competitors and tips on how to find your competitors. (http://www.berserkia.com/blog/doing-a-competitive-analysis)

What’s next?

This is a guest post by Wim Rampen a data driven marketer who questions popular customer loyalty myths. Wim shares his thoughts in his blog and tweets at @WimRampen.

You should get your guest post submission in now. It takes only 100 words!

 


Pricing is about capturing a Company’s fair share of Customer’s value co-created. Aligning both, to further increase a company’s Customer equity, requires a shift from exchange to use & context based pricing strategies, imo.

Hence these three questions for you to answer in your specific style, that I so much enjoy:

1. What’s your point of view wrt pricing and optimizing profits over the Customer’s lifetime? And when/how should one (not) apply such strategies?
2. What’s your point of view on renewal pricing strategies?
3. What’s your point of view on dynamic (customer/context-based) pricing strategies (eg in subscription based business models)?

Marketing, Pricing and Value: a Black Friday Story

This is a guest post by Gerado A Dada, an excellent data driven business leader I met through my blog. Gerardo has been at the center of the web, mobile, social and cloud revolutions across more than 15 years of driving business strategy and product marketing for leading technology companies including Rackspace, Bazaarvoice and Microsoft. Gerardo is the author of the blog www.theAdaptiveMarketer.com and is on twitter at @gerardodada.

Have you written your guest post yet?


 

Line at UGG Factory Store (1)Like most people in the US, during Black Friday week my inbox received an onslaught of promotional emails from every company I have done business with. All of them, without exception were promoting sales and discounts.

“When a marketer’s creativity runs out he defaults back to price discounts. “ (link: http://wp.me/pkYTD-6h). Creating a promotion or a sale is the default way to generate sales in the short term. Even though we know, deep down, that short term discounts erode value and train customers to expect discounts as JC Penney learned the hard way (link: http://www.fool.com/investing/general/2013/04/09/3-reasons-jc-penney-is-living-on-borrowed-time.aspx )

It was Black Friday and we decided to stop by the Factory Outlet in San Marcos – my daughter had an eye on a pair of UGG Boots that I was hoping to get at a good price. This is what I found:

(picture with a line of shoppers outside the store)

It was not that surprising to find a line outside a popular store, especially on Black Friday, but there were a couple facts that made this experience interesting for me as a student of marketing and consumer behavior:

UGG Australia was not offering any significant discounts. Many models were being sold at list price. A few had a small discount. I did not see any pair of boots being sold for under $175. A few feet away, a store had a big sign promoting 60% + an additional 30% discount on everything. You could get a high quality pair of booth for about $50. The other stores with long lines were Coach and Michael Kors.

These are my observations in relation to the experience:

  • Customers buy based on emotions. How can you explain customers lining up to pay over $450 for a bag made of PVC plastic? (optional picture) – by the way this product was backordered at the time I am writing this post.

  • The value of the product is not in its specifications, quality of the materials, features or benefits. The value is in how it makes customers feel. When you wear UGG boots and a MK bag, you feel like you belong, you feel fashionable, you feel successful. The product is the experience.

  • It’s not the price, or the discount, but the feeling that you are getting a good deal that counts. The shoppers in line felt good, even if they really did not get a good deal. The end price was not as relevant as the feeling that they were getting a good deal. After all, who likes paying list price?

  • Even premium brands need to provide the feeling of offering a good deal. It does not have to be a discount, though: sometimes free shipping, personalization or an accessory could do the trick.

  • All the talk about brands going away? Nonsense. Brands are, and will continue to be, extremely valuable. You can probably get a handbag of similar quality and similar design for 1/10th of the price at Target, yet customers happily stand in line and fork out their hard-earned cash for a brand.

My call to action to you: before you start you next price promotion, think about how you can build a brand, an experience, that makes customers feel great, and makes them happy to spend more money with you.


Waiting for Mobile Apps Payoff

The free to fee move always seems to cause customer backlash. Should we even call them customers if they were not paying to begin with? Be it the problem American Red Cross faced with World War II veterans, social network platform (remember ning?), or an astrologer telling fortunes of millions the move from free to fee results in some kind of backlash.

Here is what the astrologer did to her pricing,

Miller had recently refreshed her iPhone app and added a subscription priced from 99 cents a day to $50 for the year.

Want your daily fortune told?  Wouldn’t you think 99 cents is worth it? But here is how most of the  readers (not customers) reacted,

The astrologer tried to defend her price increase. She tried using the cost argument,

All $50 does not go to me.

In addition to paying to upgrade her mobile applications — a process she said cost six figures — she said she also had to pay for researchers and editors

You got a great deal for a long time

All these are indeed true. Yes she had to share the price she charges with Apple, with App developers, with editors. But those are her costs and not a concern to her readers. She can  charge for content only if readers felt they are getting differentiated value they cannot get otherwise.

In this case I am not going to comment on astrology or daily horoscope, let us just say there exists a segment that likes it, believes it and values it. However they have multiple options with almost no differentiation. Even if this is indeed unique content, the initial reference price of $0 makes it hard for them to swallow the $50 price tag. May be she should have foretold them about the impending pricing change.

Clearly freemium is not the solution for most save the lucky few. What is really the solution?  Segmentation, targeting, positioning and pricing, like another premium content creator featured in the same astrologer story did,

“Instead of chasing the highest number of eyeballs, we will chase and deliver the most valuable news.”

“To succeed,” she continued, “we need to write articles that deliver value worth paying for. That’s why we’re a subscription publication.”

The lure of millions of users and the wishful thinking of doing something with them once they are inside your tent – like facebook, twitter, Dropbox, Evernote  did – is alluring. But to succeed it is about targeting the right segment, delivering value  that is worth paying for and claiming your fair share of the value delivered.

How to price premium and standard versions of your product?

It is time to repeat the old statement that I believe Pigou said but adopted by me

If one price is good, two are better.

In general, when customers’ needs are different, how they value the product are different and most importantly how they value  certain benefits of a product are different,  two prices are indeed more profitable than single price.

There is a performing arts theater in the Bay Area that rents outs its venue. For those segments wanting to hire the venue for events there are two options. Both are rented in three hour chunks. Read the brief product features below and think about the price difference between the two.

Version 1: Main Theater

Features:

  1. Ideal for live performances
  2. Steinway  (Model D, 9 ‘) concert piano on stage
  3. Stage: 40 X 20 X 12
  4. Outstanding acoustics
  5. Seats 338 people
  6. Dressing room with private bathroom
  7. Portable P/A system with three microphones

The Steinway piano you see on stage has a usage fee of $150.

Version 2:

Features:

  1. Perfect for small recitals, meetings and presentations
  2. Steinway (Model B 7′) grand piano
  3. Stage: 23.5 X 17.5 X 12.5
  4. Intimate and ideal acoustics

The piano has a usage fee of $100.

Model B grand piano costs about one fourth the price of Model D concert piano.

Go ahead and compare these options as a product manager would and give an estimate of the price difference between the two.

Now think about these options as customers would and  give another estimate.

Since thinking in relative pricing is difficult let me give you the price for Recital Hall – it is $300 for three hours.

Do I have your answer?

My answer was 50% – 100% difference (I do not give single number estimate.)

The real answer it turns out is just $50. That is the Main Theater with all its benefits costs only $50 more than the $300 price for the Recital Hall. This is the same difference you saw between a $100,000 piano usage fee and $25,000 piano usage fee.

This is not so right pricing. While two prices are likely better than one price it is highly likely both prices are wrong – wrong in the sense of profit maximization.

Before I point out why it is wrong let me point out things that are done right

  1. The two different versions differ nicely on many key customer dimensions – number of people, ambience, image, piano option and end use (customer job to be done)
  2. The piano usage fee is additional – perfect unbundling since some may want it just for the scene while others may really want to use it.
  3. The concert piano option is available only with Main Theater – if you value it more you cannot choose the Recital Hall.

(Note: Think of these three pricing levers for your freemium webapp – can you unbundle the right feature? can you think of a feature that will not be available in lower priced version? …)

All these are great but the price difference is wrong for these reasons

  1. If the goal is to make it affordable to most then the lower priced version should be even lower. At just $50 difference it is not a huge discount compared to $350 version. Those who can afford $300, will most  likely upgrade to the Main Theater. This would leave to poor resource utilization and dismal monetization.
  2. If the goal is to maximize profit the Main Theater is priced too low compared to the Recital Hall. Just  by the sheer number of audience it can accommodate,  stage and other benefits this offers lot more value to customers hiring it for performances. The theater is leaving money on the table.

The way to fix this is not just take my 50-100% number but study the customer segments – find out the jobs they are hiring the two auditoriums for, how they value the different features and come up with a price. (Can you say conjoint analysis? Or lean startup conjoint using weight allocation method.)

It is highly likely we are seeing a case of cost based pricing – the venue amortizing its mortgage and other costs over the two options rather than pricing these based on customers and value.

In that case, if one price is not good, two are not going to fix it.

 

Pricing for Different Sales Channels

If you are a fan of Bay Area farmers markets you likely would have tasted samples from an enthusiastic vendor selling Bolani.

If you ever went beyond tasting the free samples and bought a few, you would have paid $6.00 per unit.

If you walk into Bay Area Whole Foods you will find Bolani being sold for $6.80.

If you want to order online from their website it will cost you $6.99.

Can you think of possible explanations for selling the same product at different prices through different channels?

First we do not know whether or not $6 is the right price. Let us assume it is. You could argue that the vendor would have collected demand data over hundreds of weeks to set a price based on what customers value and willing to pay rather than based on what it costs them and tack on a markup. (Tall order?)

If we accept that then it is not hard to see that customers who buy through  different sales channels are different. Even if they are the same customers their purchase occasions and reasons they buy are different. Hence their willingness to pay for the same product at different sales channels are also different.

Pricing is not just tied to the product. It starts with customer segment, determined by their perceived value and varies even for the same customer based on the time, situation, and specific job they are trying to get done with the product. Understanding customer segment, job and purchase occasion helps you set the price to maximize profit without leaving money on the table and without remorse.

Foot note:

While this vendor has control over channels they control (their site at farmers market and their online channel) they have no control over pricing at Whole Foods. They have to settle for a wholesale price Whole Foods is willing to pay as long as the total profit from adding the sales channel is more than they would have had otherwise. (See a detailed discussion on math on adding a sales channel in my book.)