Why Better Pricing Builds Company Value
It was one of the most intense project I’ve been a part of. The project was challenging from all angles — from subject-matter to project logistics — but it would turn out to be one of the most valuable experiences to help me understand pricing from a company valuation prospective. Let me explain.
Our client was considering making a bid on a leading marketplace company. My team was brought on to offer strategic guidance on the pricing and revenue opportunity of the acquisition company. Put it another way, we wanted to know if there was reason to believe the company’s growth forecasts. (*If you’re a startup founder or an entrepreneur who has ever looked for or is currently looking for funding, the exercise of supporting your value and growth forecast should sound familiar.)
The core questions was clear. What we were after was more than an exercise about whether the numbers added up, but a deeper look at how pricing and the capabilities required to effectively price was in place to support growth. This meant challenging the existing price structure and levels for gaps, but also critically assessing:
- Market and customer positioning
- Competitive strength
- Company’s processes and structure to execute
I talk to entrepreneurs and companies all the time about the importance of pricing to growth and commercial operations, but this project put into context how better pricing can enhance (or harm) a company’s value. Why? Because I saw pricing not only as a revenue and profit driver, but is also how pricing is used as a tool to position the company in the market, influence customer perception and operationally touches all parts of the company.
If you are looking for ways to start enhancing your company’s value with better pricing, here are some lessons I’ve acquired working with leading companies and startups to get you started.
Foundation: Understands pricing is about creating shared value, not just setting a price
You and your company spend enormous time and energy creating a product that will excite and enhance the lives of people who use it. The challenge most companies face is in extracting that value through pricing. Companies that look to create shared value between the customer (the benefits most valued in your product) and your company (extracting value by creating pricing structures and levels that align with customer benefits) do the most to enhance the company’s value.
Too many companies and leaders fail to see that pricing evolves and iterates from the moment a product idea is conceived. There is definitely science behind pricing. There is also an art that must be managed. Customer preferences and requirements evolve and the product iterates. Pricing should at least keep pace, and even better to get out in front before changes occur. Loss of monetary value can and should be avoided, but requires an early recognition of the role of price to the growth story.
[№1 cause of startups struggling] “they don’t charge enough for their product”
— Marc Andreessen, Co-founder of Andreessen Horowitz
A company’s ability to iterate and innovate pricing is a powerful way to assess how company extracts value and creates willingness to pay for the benefits created for customers. Moving from a foundation of simply setting a price to pricing holistically — from product to customer to financial — brings tremendous value not only in the immediate future, but also long-term.
Operations: Pricing shows how the company is organized and executes
Companies today understand that silos between teams and functions can harm team culture and the ability to successfully execute. Unfortunately, the pricing function too often sits tucked away in a gray area, like an organizational orphan.
What makes pricing unique is that it touches all parts of the business from finance to marketing, sales to customer service, so it’s vital that the feedback loop between groups is regular, connected and integrated for future pricing decisions.
This also means having the right individuals and teams in place to champion the pricing processes. They go beyond surface level insights (e.g. price is high/low) and asking the questions that assess the value of your product and assign prices. The organization and process is designed to increase confidence in the pricing decisions made, not add bureaucracy.
“If you have to do a prayer before you raise the price 10%, then you’ve got a terrible business”
— Warren Buffet, Chairman Berkshire Hathaway
When there is disconnect — where teams are excluded or processes not seamless — is often when challenges arise and impacts revenue and growth. This ultimately harms the value of the company not only in opportunity cost caused by delays or partial rollouts, but raised concerns of future ability to successfully implement.
Leadership: Pricing shows how company leaders make decisions and executes
“The best business? It’s one where you can look in the mirror and say, ‘Today, I’m going to raise prices.’ And you can do it.”
– Warren Buffet, Chairman Berkshire Hathaway
I love this quote for many reasons, but what always made this so instructive is the insight that pricing is not just about setting the level, but the leadership to achieve the prices required to help a company thrive. Pricing is a leadership question and Buffet challenges leaders to understand the value created and the confidence to extract that value.
As simple as that may sound, many leaders balk when it comes to executing a new price or change existing prices. I’ve seen it many times irrespective of the company’s industry, size or geography. There is a natural fear that leaders feel they (1) don’t have enough analysis to make a decision, (2) don’t believe the analysis they have to make a decision or (3) even with evidence, an aversion to risk rocking the boat.
This is not to suggest non-action is necessarily bad action, but to highlight the large responsibility of company leaders on how well pricing is executed. The pricing can be high or low, tiered or dynamic, but figuring that out and taking it to market impacts the company’s on-going value creation. Eventually leaders have to figure out pricing and value extraction, and failure to get a handle on pricing and its execution can end in more challenging transitions.
I can imagine what many entrepreneurs and startups must be thinking, “this may apply to a $1bn company, but is it really relevant for my early-stage start-up?”.
My response? Is it absolutely relevant.
Pricing and monetization is a core component and competence of any company; and a core driver of the company’s value. What many companies are learning now is that pricing is not a bolt-on of something to do in the later life of a company or after a product has a ‘steady’ following, but a core test of early product-market-fit and assessment and refinement of the value the company can create.
This is hard, but the implications are so widespread and important. These pricing decisions (or lack of) can influence product perception and value, customer retention, the financials to sustain the company or the current runway and so on and so forth. Successfully innovating and building better pricing positions your company to confidently build the value created and future prospects for growth.
Originally published at www.helloadvisr.com on May 5, 2017.