Why Pricing Should Be Your First Focus, Not Your Last
Enter the Project Grow Challenge presented by Entrepreneur and Canon USA for a chance to win up to $25,000 in funding for your business. Deadline is Sept. 15 2015. Click here to enter.
Startups often treat pricing as an afterthought. So eager they are to launch, that they wait to broach the question of price until right before their product hits the market. While this isn't uncommon, it's poor thinking from a strategic perspective.
Worse still, when startups do eventually settle on a price, they typically fail to think strategically about it. The biggest mistake companies make is offering a product that's not unique enough to demand a premium and setting their prices according to the industry standard.
Think about it: If your prices aren't your differentiator, what else is? If there answer is nothing, then you're in for a world of hurt. By failing to push the envelope (a.k.a. innovate), you're positioning your product as simply one more option for consumers.
Of course, there's good reason why there's so much confusion on the subject. As a young 'trep, you may have learned the four Ps of marketing in business school: product, price, place and promotion.
While college may have given the impression that these are four equal pillars, the only one that doesn't have any effect on the cost structure, or expenses required to produce a product or service, is price. So, the common thinking is that price is just a function of the other three.
Instead, I think pricing is the most important element of the marketing mix. It's not one of the four Ps. Rather, it's the P that dictates the direction of the other three.
Consider pricing innovations offered by recently popular subscription services and flash-sale sites. How you set your company's pricing structure can be the disruptor that takes a startup to industry leadership.
If you still don't believe me, here's a look at some of the more interesting business-pricing success stories in recent history:
Netflix and Redbox
Netflix disrupted the established rental market with a subscription-based pricing model, which eventually changed how we rent movies. Redbox said movie rentals should be $1 per day and provided self-service kiosks at places like grocery stores and convenience shops to provide a simple user experience. Blockbuster was attacked from both sides on pricing strategy, and its locations, promotions and methods of distribution became irrelevant. Both Redbox and Netflix promoted pricing at a lower perceived cost, but they made it happen by changing how movies were distributed.
After analyzing consumers' threshold for a top-notch experience, Starbucks believed people would pay $5 for the same coffee that used to cost $1 and then devised a scheme to justify that strategy. It turned out a lot of people would line up for a latte from a barista in a swanky coffee shop. Of course, the use of higher-quality beans, aided by a heaping helping of potent caffeine, helped.
Elon Musk's electric car company, Tesla, correctly bet that people would be willing to pay $100,000 for a high-performance electric vehicle. That much is obvious, as the vehicles promptly sold out after hitting the market, and consumers remain more than happy to sit on a waiting list for years. It crafted a plan to make that happen. Now, others are copying its model.
As these examples demonstrate, it's not enough to make pricing based on just your bottom line. Instead, it should reflect fundamental knowledge about your consumer and market.
Following the lead of these companies in their pricing strategies is the approach I recommend for young entrepreneurs and startups. Let your price determine whether you should even be entering the marketplace. If you identify a pricing strategy -- and consumer need -- that's likely to shake up the marketplace, then you have something.
How have you innovated on price? Let us know how it worked for you with a comment below.