Pricing power has a huge impact on how investors see your company. One rule of thumb used in due dilligence is to ask, 'Can this company raise its prices?' If the answer is no, or if there is a lot of downward pressure on prices, then company valuation goes down. Smart companies understand their pricing power and are taking steps to increase it.
Valuation is the process of determining the equity value of your company. Potential investors, and lenders for that matter, will always evaluate your company’s earning potential. They will ask how you intend to achieve those earnings, and for evidence to show that you are on track to actually achieve them.
Pricing is where all of your critical marketing decisions come together. Investors will assess your pricing strategy and pricing performance as part of their due diligence. Let’s look at the key marketing decisions your investors will scrutinize.
This is the first step in demonstrating that you understand your company’s market opportunity. Use value-based market segmentation and not just basic firmographics. A value-based segmentation ensures that you understand the value you are creating for your customers and that you can target the customers that get exceptional value. As mentioned in my previous blog, why good pricing strategy starts with market segmentation, value is always tied to a specific customer segment. You need to understand the pattern of needs, attitudes, and behaviors to identify customers who will recognize the differentiation of your offering and the value it will deliver to them. Market segmentations underpins your calculation of market size.
You cannot target all of the segments you have identified. Targeting means that you have identified the most attractive segments. Proper targeting will impact your speed-to-growth and is a key component of your go-to-market strategy. Targeting is about prioritizing your marketing investment, both financial and in terms of effort. Targeting is your commitment on what you think the ‘best path’ to growing market share, revenue, or profit. You also need to understand the sequence in which you are going to go after your target segments. and explain “the why” behind your most attractive segments—explain how your targets influence each other. You also need to consider the buying process of your prospects and customers.
Unique and differentiated value proposition
Your value proposition determines your ability to realize your potential earnings. Knowing your unique and differentiated value proposition depends on how well you have segmented your market and targeted customers using value drivers. It answers the question of how you are going to capture your market. Pricing is an expression of your value proposition. Your value proposition, and therefore your price, is always relative to the next best competitive alternative. Investors want to know that you have done your competitive analysis. Claiming there is no alternative will not fly. You need to be able to substantiate and quantify your unique value proposition—and be able to articulate your unique differentiated value to convince both your customer and your investor that your offering is the one to choose.
This is a measure of your market opportunity and provides an indication of potential earnings. You will need to demonstrate to investors that your total addressable market (TAM) and your service addressable market (SAM) is large enough to justify your valuation. Your segment sizes (number of prospects) and the value (revenue) you are able to capture from them is used to calculate this number.
Customer traction is defined as “quantitative evidence of market demand" by Naval Ravikant. It is the evidence that someone wants your offering. Customer traction demonstrates to your investor that your company is growing in value; it communicates momentum in market adoption.
Pricing is the lever to win higher profits, revenue or market share. Optimizing price communicates value because you are connecting to your buyers emotional and economic needs. Developing the correct pricing metrics helps you to monitor price acceptance, guide behavior across pricing tiers, and be better prepared for competitive positioning.
Price to create and capture value for customers and your investors (financial stakeholders). Pricing is where marketing strategy gets real. Your customer probably does not know what segment they are in, but you and your customer have to agree on a price if you are to win a sale. Pricing provides direct insight into segmentation, targeting, value proposition and communication. Good pricing practices are part of how to sell. Contact us at Ibbaka to learn how we help our customers understand and reach their valuation metrics to secure financing.