In the Japanese animated movie, Kiki’s Delivery Service*(see note below), the little witch, Kiki, decides to start a delivery business using her broomstick flying skills. For one thing, that was the only magical power and there was no other witch in the town. That’s a very good start,
- playing to her strength
- delivering a magical (pun intended) and innovative service
- picking a market where there are no competitors.
Is that enough? What is the plan for monetization?
Her very first interaction with a customer goes like this,
Customer: So what do you charge for your service?
Kiki: I don’t know. I have not thought about pricing yet.
Customer: (stuffing some cash in Kiki’s hand) I think this ought to cover it.
Kiki: (pleasantly surprised) Oh this much for delivery!
Be it a delivery service on a flying broomstick or a product that will change the way we do XYZ, pricing it cannot be an afterthought – a chore to take care of after the fun part of product development.
When you neglect to find the price customer segments are willing to pay before you go to market you end up doing pricing based on cost. Simply tack on a percentage margin to wrongly calculated cost per unit and you have a price. To quote from Henry Ford’s autobiography,
what earthly use is it to know the cost if it tells you you cannot manufacture at a price at which the article can be sold?
Or paradoxically you act rationally yet not profitably by correctly viewing the cost you have already spent on your data center, product development etc. as sunk cost and decide “free” is the best price. This is based on the assumption that, “customers don’t know they need this product yet. Once they start using, they will fall in love and will pay for it”.
Most definitely price is not something you let your customers decide. While the narratives we read about customers falling in love with products and paying what they value may capture our imagination, it is not realistic, scalable or repeatable.
The benefits you deliver creates value to your customers and pricing lets you get a fair share of the value created.
If we do not fully understand how our product adds value and hence price it accordingly how can we expect our customers to know what price to pay?
Note on the Kiki’s story: Used only to set the stage, for illustration and not as generalization. The need for effective pricing and how to do it is amply researched, documented and practiced. We do not need a movie for our pricing lessons. That said, it is a great movie, not just for children.