How Product Positioning Helps Set its Price and Define Competition

Does the market really set the price for your product? Do you have any control over price? How can you then succeed with a Gym that charges $500 per month when market decides the rate is $45 a month?

For this we need to start with Segmentation and Product Positioning.

Customers buy products get a job done. And the job to be done varies with customer segments and context. The term ‘job’ really represents the unmet need at hand. It covers both utilitarian as well as hedonistic (and hence needs and wants). It also makes sense to view this as ‘hire’ decision since they can either stick with what they already have or switch when they find better alternative.

Positioning is creating a unique, relevant and differentiated positioning in the minds of the customers for your products. Product positioning is telling customers – specifically, targeted customer segment- what job you want them to hire the product for.

Customer Jobs To Be Done Growth Matrix

. From the jobs perspective it is telling them clearly which job you want them to hire for and why your product is the most suited candidate for that job. While your product could be hired for many jobs you want to go after those where you have sufficient differentiation and also pay well.

Take the case of boutique gyms that charge close to $500 per month when you can sign up for most gyms for $30-$50 a month. In fact you can get an year worth of membership for less than one third of what you for a month at boutique gym. But customers are flocking to the boutique gyms, happily paying far more than what they used to pay (take that reference price). Market research says of the 54 million members of fitness facilities, 42% use boutique gyms paying premium prices. That number is nearly double of what it was the previous year.

Take the more recent example of SoulCycle which filed its S1 for going public. It teaches riding stationary bikes set to music and charges $35 per class and had 2.8 million rides last year from just two states (38 locations).

What happened to market deciding prices? How do you get customers to pay more for what they can get for free or cheap?

It starts with segmentation and ends with product positioning. The target segment clearly has not only willingness to pay but also enough wherewithal to pay. The goal is not market share although that could come later. The goal is give the target customers an excuse to pay their premium prices, willingly.

If fitness is the job to be done the candidates available for this job are very many. Most are free – just put one step in front of other and keep walking. In the organized fitness arena there are many chains that offer equipments and some training. So if you position your new product – the boutique gym – purely for fitness the price you can charge for it is determined by the price of alternatives available to the customer.

On the other hand if you expand the job to be done beyond fitness – more like make fitness as included freebie while you focus on higher order jobs the alternatives shift and hence the price points shift. The boutique gyms focus on different customer job to be done than fitness,

As exercise routines serve more roles in people’s lives—stress relief, psychotherapy, social outlet, even personal identity—the expense of boutiques becomes easier to justify, their devotees say.

Boutique-fitness fans also say they like the fact that most workouts are led by instructors or coaches. Some say they feel a sense of belonging that overrides the fact that they’re spending more for fewer disciplines than what’s available at a health club.

If the job to be done is therapy or a social outlet the alternatives are prices are much higher price point than just gym membership. The visit to gym becomes more than aboring routing, it is an experience that creates sense of belonging. So the boutique gyms get to signal the higher price point and set a price just low enough below the alternatives to get customers to pay.

Take the specific example of SoulCycle which states this in its S1,

SoulCycle isn’t in the business of changing bodies: it’s in the business of changing lives.

What we create: A community for our riders.    SoulCycle is a business built on relationships. It starts with our leadership and extends through our studio teams, instructors and corporate employees.

We build our rider communities by developing relationships with our riders and encouraging them to develop relationships with each other every day. The concept of community and mutual support is reinforced in every single SoulCycle class. We ride to the rhythm of the music, moving on the bikes together as a pack. We are accountable to one another during class, and we celebrate our journey together when class comes to a close. We believe the SoulCycle experience fosters loyal communities of riders whose relationships extend well beyond the doors of our studios.

If I ask you to pay $35 per class for teaching you how to pedal a stationary bike you most likely would laugh at me. If I offer you to build relationship, community and mutual support you will be more than willing to fork over that price.

Market does set prices for alternatives. But you get to choose which alternatives you want to be compared against by positioning your product for the right customer job to be done.

Final note of caution – whether the positioning is sustainable or not is not discussed here. We do not know how defensible is the current positioning of SoulCycle and their ilk. I will discuss the topic of sustainable positioning in coming weeks.

How to fix your wrong 1.0 pricing?

fitbit-flexfitbit-forceFitbit, the San Francisco based maker of wearable fitness devices, recently announced a new device Fitbit Force. This new product launch comes less than six months since the release of their last device, Fitbit Flex. When you look at the two devices side by side they do look almost identical  with some feature additions.

The Force, as you can see, adds a display that gives more descriptive metrics than just four LEDs progress bar in Flex. Internally it also adds features like stairs counting.  It is still a product evolution. Yet, instead of choosing to call their new version as Flex 2.0 they chose to introduce a new brand, Force.   To give an analogy it is like Apple deciding to call iPhone 5s as  iPhone Force or some such name.

The answer to why they chose to introduce a new brand for a product evolution lies in how they chose to price Force. Fitbit Flex, when launched in May, was priced at $100. Force is priced at $130, a price realization of additional $30.  Surely you do not believe their marginal cost to add the tiny display or the altimeter is  $30 do you?

After  Fitbit launched Flex at $99, it is highly likely they realized that  a device someone sports on their wrist is lot more about image than about pure fitness. That is, in a basket of reasons why customers buy a product the hedonistic reasons outnumber and outweigh the utilitarian reasons. And hedonistic reasons carry higher willingness to pay over utilitarian ones (just look at the luxury market).

Another aspect is the profile of customer segment. Those who buy a fitness band to proudly display on their wrist are less cost conscious, have higher willingess to pay and have higher disposable income (wherewithal to pay).  So with $100 pricing, Fitbit was leaving too much money on the table by not capturing more consumer surplus.

They needed to fix this initial pricing mistake. And introducing 2.0 version was not going to do it because of previous reference price and its inability to properly serve the hedonistic aspect. Besides they would have to drop the price of Flex below $100 or discontinue it.

So they took a trusted play out of the pricing playbook – Shift the product category, which you can do by deliberate product positioning or by branding. With new brand, Force, they are telling their customers that this is a new category. More importantly their customers just want a reason to give more of their consumer surplus and this new brand gives them that reason.

Previously I wrote about this category shift in moving from free to fee. The same rules apply in fixing your past low price  mistake and getting price realization. It is a new device. It is a new brand. It is a new category. It breaks the comparison and helps them set a new higher price. It gives their customer a reason they are looking for to pay the new price.

Fitbit Force also took another additional step that results in better price realization. Flex ships with two bands for different wrist sizes. That was additional marginal cost with no profit driver. Force switched to one model one size, saving cost of extra band.  Don’t add a cost  component that does not serve a value driver.

Overall good moves by Fitbit. Not great, as I still believe there is more to be gained with even better price realization because wearable fitness devices are extreme form of hedonistic consumptions, they are conspicuous consumptions.

Can you think of another marketer who recently fixed their pricing using branding and category shift?  Amazon’s KIndle Fire HDX. Think about why they branded the new HDX thusly and its $229 price tag.

How do you fix your past pricing sins?