Pricing Gets Harder with Growth: Lessons from a High Growth Company
As entrepreneurs, one of the most difficult decisions is how to monetize and price your product. Pricing is a ‘moment of truth’ (MOT) decision in the growth of a company. It is as important if not more important as signing-off on a product design, starting production or launching a website.
Pricing is a MOT because it helps define the product and company. This is when customers tell you how much value is between your product and their wallet. Despite the importance, pricing, unfortunately, takes a backseat.
What results is the rise of “good enough” pricing and the start of what we call corrective pricing. Corrective pricing is exactly as it sounds — prices that correct past pricing decisions that delivered undesirable results. This is not additive in building value; this is catch-up.
One of the common causes of corrective pricing is the belief entrepreneurs and companies will invest time and effort to build the “right” prices in the future. Except when they don’t. Not dissimilar with new years resolutions you make with yourself to go to the gym, life has a habit of getting in the way.
The irony for companies is with growth future corrections only become harder, more visible and more costly as time goes by.
Case study of Classpass: A lesson in pricing growing pains
Classpass has disrupted the fitness industry over the last decade. Its subscription-based platform offers consumers access to local fitness classes ranging from kickboxing to yoga outside the traditional gym setting.
Founded in 2010, Classpass made two hard pivots early in its history before taking its current form. Currently, it operates in over 30 U.S. cities and international markets, with several more cities planned.
With over 20 million classes booked and built a loyal consumer base, investors have taken noticed. To date, they have invested over $100 million into the promise of Classpass.
By most measures, Classpass represents successful growth and monetization, but look deeper at the pricing history, and a different story emerges.
Who’s captaining the ship? Price changes and more price changes
The last decade has seen the rise of the boutique studio such as SoulCycle, Barre and Crossfit and the evolution of the $40 fitness class. For comparison, the average gym membership in Los Angeles can range from $40 to $60 per month.
Classpass took advantage of this trend by offering a $99 per month unlimited plan; a fantastic offer for consumers.
In actuality, the price point proved more financially challenging for Classpass. In 2015 — less than 24 months after introducing the $99 unlimited plan — Classpass increased the unlimited plan to $125/month; a 26% price increase. A large increase by any standard, and clearly required for the company from a revenue sustainability perspective.
Unfortunately, the changes did not end here. Over the following 20 months (see chart below) a series of whiplash price changes would see the elimination of the popular unlimited plan, introduction of tiered and regional pricing, and aggressive promotions (in part to win back customers).
Hard (but avoidable) growing pains
One of the results of the series of prices changes is the lost of customers and goodwill. Classpass lost an estimated 10% of customers.
The management organization also took a hit most notably the replacement of the founder and CEO.
One of the core functions of pricing is to keep the company’s light on, and as responsible entrepreneurs and business leaders, that is what Classpass did. The margins relative to their cash on hand were originally misaligned and unsustainable at existing prices.
While things appear to be looking up for Classpass there are several takeaways all entrepreneurs can learn.
Growth = Complexity
Growth inevitably leads to greater complexity and layers to an organization and its operations. Anticipating and managing increased complexity is core function of an entrepreneur; especially the head of a growing company.
Know what you don’t know and how this gap will impact pricing and growth. This is the opportunity to build your pricing foundation with simple processes. This will ease the burden of managing price through growth.
Proactive pricing: Helping overcome revenue challenges
While pricing is not the most common term in the startup or entrepreneurial vernacular (on Medium, less 1,000 readers follow the tag ‘pricing’), pricing is a key growth driver that all entrepreneurs can influence.
Learning by doing is part of every entrepreneur’s DNA, but so is operating as effectively as possible. The idea you can go back and fix things later should be accepted as a relative concept. Ask the founders of Warby Parker, the eyewear makers with a billion-dollar valuation, how important it was to put in the work and get expert advice on pricing right from the start.
Like other efficiency hacks aiming for results with the least amount of cost/pain, why would any entrepreneur treat pricing differently?
Pricing drives growth: From startup to company
While the focus of revenue growth by many investors and venture capitalists is on influencing the volume-side of the equation, insufficient attention on price can have costly results.
Having a stronger grasp of the value proposition, customer insight and anticipation of pricing needs can have a huge impact on the health and trajectory of the company.
Final thoughts: Happily ever after?
While Classpass continues to write its story, what is clear is the role pricing played in its story of growth, customer brand building, and product development. Through the trials and shake-ups, Classpass has been able to raise another $70 million in investor funding.
Unfortunately, not all companies have this outcome. Pricing pain is preventable if proactive and treatable if you’re lucky. While hindsight is 20/20, ignoring the lessons of history is not advised. Some takeaways from Classpass’ journey:
- Proving financial viability: Had Classpass not made the painful, but necessary price changes, the financial credibility needed to appeal to investors would be in doubt.
- Building core skills: Through this experience, the several pricing lessons will help the company in the future. While most visible is the CEO change, the turbulent 24 months was an opportunity to assess internal pricing leadership and make required adjustments.
- Managing future pricing complexity: While top-line prices may remain stable, other pricing tools (e.g. promotions) need active management. Especially with the large churn of customers, Classpass is actively using promotions to win new as well as lost customers. As anyone with a gym membership knows, promotions to win customers changes the value and perception of the product and potentially creating a promotional cycle needed to support subscriber volume.
As a founder of a LA-based SaaS startup recently shared with me, the work she’s putting into pricing is to find out what she doesn’t know. The initial aim is not to perfect her prices, but to avoid obvious mistakes and build the necessary process forward. A great mindset to take as she drives her fast-growing company forward.
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Originally published at www.helloadvisr.com on July 18, 2017.