On Saturday, April 22, Ibbaka partner Steven Forth gave a talk at the New Ventures BC Startup Sprint. Some people are surprised to see pricing as a major theme at a start-up event. The other themes were more predictable: Product Market Fit, The Business Model Canvas, Business Modeling and Talk to Angels—but pricing! Why is New Ventures BC asking early-stage innovators to think about pricing?
There are some who advise early stage companies to worry about product market fit and leave pricing for after they have established a position in the market. Product market fit is, after all, the precursor for everything else. If you don't have a minimum viable product that fits the market then all else is academic—perhaps—but the deferral of pricing is based on a misunderstanding of what is really involved in pricing and setting a pricing strategy.
Some people will tell you that 'the market sets the price' or think of pricing as 'basically just picking a number.' Both of these statements are so simplistic that they might as well be false. The market is reshaped by each new product that enters it, and part of innovation is to think through how your new offer will change the market. Any price is only meaningful in the context of your offer's value, your pricing power, and your pricing strategy.
So the first step in pricing is to understand value. There are a couple of key things to understand about value.
- Value is always for a specific customer, or at most a segment of similar customers. (We will get to what similar means in a moment.)
- Value is relative to the alternative. The customer always has an alternative, even if it is doing nothing, or continuing to do what they are doing now (in fact, this is the most frequent alternative for many innovative new solutions.
There are two main components to value: economic and emotional. New offers have to have both. In general, economic value is more important than emotional value for B2B solutions and emotional value is more important for consumer. But even for B2B solutions, and especially for innovations, an emotional connection with the buyer is critical.
We are going to go deep into economic value in subsequent posts. So for now, let's suffice to say that you measure your economic value by the impact you have on your customer's business.
- Do you help them to increase revenue? If so, where, how and by how much?
- Do you decrease operating costs? How much and how reliably do you do this?
- Does your solution reduce the need for operating capital? Perhaps, it helps your customer collect accounts payable faster, or accelerates inventory turns.
- Some solutions will help companies reduce capital expenditures, perhaps by making plants more efficient.
The foundation of B2B pricing is understanding your differentiated economic value. Differentiated in that the focus is on what your solution can do that the alternative cannot. Value connects back to segmentation. Finding groups of customers that get value in the same way is the key to market segmentation.
Once you understand value you have to figure out how to track it. What is the unit by which your product or service is consumed that tracks with value. This is your value metric. B2B SaaS and Industrial Internet of Things (IIoT) solutions can create value in many different ways. There are as many value metrics as there are solutions. The key is to understand your key value metric and then track it. When you design your data model, design in value tracking.
A good pricing metric will track the value metric. Pricing innovation is generally the discovery of a new value metric paired with a pricing metric that tracks it. The classic example in B2B SaaS is Google Adwords (which was invented at Idealab and first implemented by Goto.com). The value metric is the click through. This is a better value metric than 'impressions' which is what advertisers used to buy from content publishers. The click indicatessome actual interest on the part of the viewer and interest is what advertisers want. Pay per click is a price metric that tracks interest.
At the beginning, these four simple (but not easy) steps can get you started.
- Understand the value you provide to a specific groups of customers relative to their alternative solution.
- Segment your market by finding groups of customers that get value in the same way.
- Identify the value metric that best tracks how customers get value (customers in the same segment will have the same value metric, by definition).
- Find a pricing metric that tracks the value metric.
(Note: you need to code the variables in your value metric and your pricing metric into your data model. Doing so will let you tune your pricing later to make sure that your pricing encourages your customers to get value from your solution.)
Get these four steps right and you will be well prepared when it comes to choosing a pricing strategy, enhancing your pricing power, designing your pricing model and building it into a pricing architecture and to then test and optimize your pricing in the market.
Want to learn more? You can see the presentation from New Ventures British Columbia here. Or contact us, and we will make sure you get off on the right track. Contact firstname.lastname@example.org.