How to Enhance Product-Market-Fit: Add a ‘P’

Yesterday, WHOOP announced lower pricing on prepaid membership plans.

In the midst of a period of record high inflation and a potential further economic downturn in 2023, many other companies have decided to rethink their pricing as well. In 2023 alone, other reputable consumer, health, and fitness brands such as Strava, Tonal, Hydrow, and Shopify have all raised their prices.

Why is WHOOP different? Well, I can’t speak for the other companies raising prices, but we have been working hard to make important changes to our business model to allow for the flexibility to lower prices and achieve our core mission of helping more people unlock human performance.

While the two images above of our join flow may make a price change look quick and easy, there is a lot of thought and work that goes into it. Let’s dig into the details below!

Product-Market-Price Fit

People most commonly refer to product-market-fit on its own as the degree to which a product satisfies a strong market demand, but they are missing the critical element of price.

Let’s enhance product-market-fit by adding a ‘P’: product-market-price fit. My colleague Parsa Saljoughian digs further into how to best understand the product-market-price fit equation, along with some great examples in his new post on pricing here. One graphic I will borrow directly from his post is below.

Cost is the amount it takes to make your product; price is the amount you charge your consumer for the product; perceived value is the consumer’s willingness to pay for the product.

Parsa details the above graphic as follows:

“Your customer needs to find that your price falls within their range of what’s acceptable, that being equal to or less than perceived value. Conversely, your ability to price is constrained by your costs if you want to capture any value. Pricing at perceived value is the price ceiling, maximizing company margins at the expense of consumer surplus. Pricing at cost is the theoretical price floor, maximizing consumer surplus at the expense of company margins.”

Just because you have a product that satisfies a strong market demand does not mean that the market will pay an infinite amount of money for it. Let’s think about my favorite cookie in NYC courtesy of Levain Bakery. Today, one dark chocolate peanut butter chip cookie costs $5. The price of this one cookie has slightly increased from $4 to $4.50 to now $5 over the last few years. Each time I go buy one of these cookies, I think about how it’s quite expensive for just one cookie (granted, they are large and absolutely amazing). That said, my willingness to pay is not infinite. If, say, one day, I showed up and, all of a sudden, the cookie costs $20, I would surely turn around and walk out without the cookie.

When companies, like Levain, have product-market-fit, they have the difficult job of determining the best price that optimizes their product-market-price-fit. There are many factors for them to consider — costs, competition, industry, supply / demand, willingness to pay, etc. Below, I’ll dive into a few of the most common pricing strategies.

How to Price

While there are many nuanced approaches to pricing, I’ll review just some of the most popular ones below, along with pros and cons of each, plus some example companies / products and industries that use the specific approach.

Cost-Plus Pricing: This one is simple, and it’s in the name. Add up the costs of producing one unit and add some margin to it.

• Pros: Simplicity and predictability
• Cons: No consideration for competition, consumer willingness to pay, etc.
• Company / Product: Mark Cuban’s Cost Plus Drugs. About as clear and transparent of a pricing model as it gets.
• Industries: Retailers, grocers

Competitive Pricing: Price based on what your competition is charging for similar products. You may decide to charge the same (cooperative pricing), or you may decide to charge more / less, but either way, you are using your competition as a benchmark.

• Pros: You can ensure you are “within reason” for consumers (assuming similar products), and, depending on whether you charge more / less, you may be able to differentiate yourself as either a premium (charging more) competitor or a more affordable (charging less) competitor.
• Cons: May not adequately consider your company’s unique cost structure; not always possible to consistently adjust prices based on what competitors are doing
• Company / Product: Unless a company is introducing a truly groundbreaking product, it’s likely that all companies will look at competitors in some capacity. One fun example of this is the NYC pizza pricing debacle that came to a head in 2012 when two pizza parlors drove each other’s price of one pizza slice down as far as $0.75/slice. The two parlors finally agreed to end the pricing war (since they were both losing money — no consideration for costs!) and reprice at $1/slice — still the best (and only?) good deal on food in NYC.
• Industry: Commoditized products

Price Skimming: Set a price and lower it over time as the market evolves and / or as you introduce new products.

• Pros: Maximize profits of new products while opening up your funnel to more price-sensitive consumers on older products
• Cons: The need to consistently prove the value of your new, higher-priced product; the risk of competition stealing market share from your lower-priced products
• Company / Product: Apple has an extremely consistent schedule of launching new products and lowering the price of its prior generation of hardware.
• Industry: Big Tech

Penetration Pricing: Set a low price to enter a competitive market and raise it later.

• Pros: Ability to quickly win customers and steal market share
• Cons: Not sustainable and does not adequately take into account a company’s cost structure; further, it relies on your product being sticky enough / having high enough switching costs such that, when you do ultimately increase your price, your consumers won’t jump ship to a competitor.
• Company / Product: Gillette’s Razor-Razorblade model is one form of penetration pricing. Charge a very low price (e.g. at cost) for the razor, and then charge more for the razorblades to make your profit.
• Industries: Streaming, internet service, food delivery

Note: WHOOP, similar to many other subscription peers, has historically employed a penetration pricing tactic of its own with the concept of a “free month.” For example, users that signed up for the monthly payment plan with 12 months minimum commitment could, in certain circumstances, get their first month free. This form of penetration pricing offers a no-upfront-cost solution for consumers to get the product before then relying on the product’s stickiness to keep the user around for the long-term.

Dynamic Pricing: Fluctuate price based on current market demand.

• Pros: Maximize revenue by increasing prices when demand is on the rise and decreasing prices when you need to sell off inventory.
• Cons: Requires complex algorithms and is often related to products that are event-based, seasonal, or otherwise most sensitive to external market conditions.
• Company: Ticketmaster. Do I buy now or wait until prices hopefully come back down the day of the event? Will prices just continue to go up? We’ve all been there.
• Industry: Marketplaces

Value-Based Pricing: Price based on what the customer believes your product is worth.

• Pros: Customer-centric and uniquely based on your own company’s product
• Cons: Perceived value fluctuates over time, and it is difficult to find a price that is fit for every customer.
• Company: Starbucks rewards customers for their loyalty and is able to charge a premium to the costs of production based on the value of its brand.
• Industries: Tech, software (note: while Starbucks sits in neither of these industries, its incredibly strong brand allows it to leverage value-based pricing)

In reality, many companies likely use a mix of multiple strategies, and, as a reminder, there are many other nuanced strategies not detailed above. Let’s go back to the Levain cookie example and think about how they may touch a couple of these different strategies. I will be theorizing here a bit, so don’t take any of this as fact.

With this one bakery, we see elements of cost-plus, competitive, and value-based pricing. As a quick aside, when I was looking for competitor cookie prices in NYC, this was the first link I clicked on, and it ranks Levain as #1! I feel validated.

What to Price

Now that we’ve weighed the pros and cons of some core strategies, we’re one step closer to actually determining the price. Aside from doing research on competitor pricing, Levain needs to understand two critical things in order to find its optimal price point: cost to make one cookie and perceived value of one cookie. Recall the spectrum below.

Levain can theoretically set the price of a cookie anywhere between cost and perceived value. Set the price above the cost to achieve some margin, and set the price below perceived value so that customers are willing to pay.

Know Your Costs

This is obviously important, yet typically quite simple to understand. For Levain, per unit costs of goods sold are likely predominantly composed of the ingredients and labor cost. The topic of unit economics is worthy of a blog post in its own right; for now, you can refer to this post here if you want a bit of a deeper dive.

Know Your Customers’ Perceived Value (Willingness to Pay)

There are several methods of determining customer willingness to pay. I’ll highlight two that I’ve seen in practice below.

Conjoint Analysis

The goal of a conjoint analysis is to determine customer willingness to pay on a certain set of features or attributes. The first step is breaking a product down into its attributes; a common example of this is a phone being broken down into its attributes of brand, size, color, and price.

Once the attributes have been defined, the analysis works by surveying consumers* on a series of “would you rather” questions. If you simply ask consumers to rank each of your product’s attributes on a likert scale, you may end up with the below summary; you’ll then have trouble making any conclusions, given how closely ranked features 1 and 8 are on the scale.

Instead, by asking consumers to make tradeoffs between features, you will be able to understand which of your features, including price, are the most valued — see below as an example.

Source: ProfitWell

Van Westendorp Price Sensitivity Meter

This analysis directly asks consumers four questions to help understand optimal pricing of a product (noted as ‘X’ in the following questions). The questions are as follows:

1. At what price would you consider X to be priced so low that you would question the quality? → “too cheap”
2. At what price would you consider X to be a bargain — a great buy for the money? → “not expensive (i.e., cheap)”
3. At what price does X begin to seem expensive? → “not a bargain (i.e., expensive)”
4. At what price would you consider X to be so expensive that you would not consider buying it? → “too expensive”

The output of these questions will look something like the below graphic. As price increases, the number of consumers who respond that X is “too cheap” or “not expensive” decreases, while the number of consumers who respond that X is “not a bargain” or “too expensive” increases. The inverse holds true for when price decreases. This results in a few intersection points that provide valuable insights for the ideal price ranges.

The intersection of the number of people who think that the product is “too cheap” and “not a bargain” is known as the Point of Marginal Cheapness. This point acts as your lower bound of acceptable prices; if the price of the product is set any lower than this point, a larger percentage of your consumers would have said the product is “too cheap,” and you’re therefore probably leaving too much margin on the table. Similarly, the intersection of the “too expensive” and “not expensive” lines is the Point of Marginal Expensiveness, which acts as an upper bound of potential prices; if the price of the product is set any higher than this point, a larger percentage of your consumers would have said the product is “too expensive,” and you’re therefore pricing out too many people. These two boundaries together provide a range of acceptable prices, while the intersection of the “too cheap” and “too expensive” lines is called the Optimum Price Point.

Source: Forbes**

*Note: to get a complete picture of willingness to pay, try to survey three groups of people:

1. Market panel — people who have not used your product
2. Current customers — people who are currently using your product
3. Churned customers — people who previously used your product

**Note: while I didn’t create this graphic, it’s quite fitting for our Levain cookie example! The Optimal Price Point is just below $5; Levain charges $5/cookie.

Now that you can measure your costs and perceived value, you know your pricing bounds. Tying it back to the graphic I borrowed from Parsa’s post, pasted below, we are reminded that there are varying degrees of surpluses to be had depending on where exactly we set the price.

Execution

Understanding optimal pricing structure and amount is a large endeavor, but actually executing is an entirely different question. Levain doesn’t just set the price of their cookies at $5 based on a couple of surveys and think the rest is history. They have to bake a tasty product to provide value to the consumer, invest in national expansion to elevate their brand, keep costs down, and much more. Pricing is an incredibly important aspect of your company’s strategy, but the entire company needs to work together to execute and ultimately maximize revenue and profits.

Back to WHOOP and our pricing change.

Below is an incredibly simplified graphic outlining our organizational structure.

Each of these functions has played, and will continue to play (remember: we can’t just set our price and move on) a critical role in executing our pricing change.

Finance, Strategy, Operations, Analytics, Legal: This group of people encompasses a wide array of functions, but each has been critical in understanding why we should change our price and each will now be critical in executing the change effectively. A few key responsibilities of this team pertaining to the pricing change are as follows:

• Study competitors and the macro environment
• Assess consumer willingness to pay
• Understand cost structure and unit economics
• Analyze key attributes and leading indicators of member cohorts
• Forecast near-term and long-term business model

Talent, HR, Customer Support: This group comprises some of the most important internal-facing (talent, HR) and external-facing individuals (customer support) in the entire company. A few key responsibilities of this team pertaining to the pricing change are as follows:

• Facilitate internal communications to ensure proper cross-functional alignment
• Motivate teams to work towards goals
• Communicate with customers that may express excitement, confusion, or frustration
• Maintain efficiency of operations

Marketing + Wholesale: We are certainly hopeful that lowering our prices will make our product more accessible to more people; it is the job of our marketing team to spread the word. A few key responsibilities of this team pertaining to the pricing change are as follows:

• Email members clearly communicating the changes and how it impacts them
• Strategize on promotional strategies
• Re-engage recently churned members
• Attract new customers that may be in the market at a lower price
• Negotiate new and existing partnerships with wholesalers

Hardware / Product: The title of this post alludes to enhancing product-market-fit with price. While this team’s responsibilities are nearly endless, I will simply say that WHOOP would not be afforded the ability to even think so deeply about optimal pricing without the other critical elements of product-market-fit to begin with. This equation starts with our hardware / product teams’ ability to create a differentiated product that meets market demand and user needs.

It is important to remember that you should always keep a close eye on your pricing strategy and be ready to evolve over time. Market conditions change, consumer perceived value may change, and competition will certainly evolve.

Pricing is a complex topic that requires a lot of attention, and I hope that this post has been a helpful primer. If not, then maybe telling you about WHOOP’s new pricing will get you to go to join.whoop.com today. Worst case, go buy a Levain cookie.

As detailed above, the list of teams and people that have contributed to this effort at WHOOP, and therefore to this post, is quite long. I would like to at least shout out a few that I have personally worked most closely with during this process. Thanks to Parsa Saljoughian and Amit Bhatt, my Strategic Finance counterparts. Thanks to Nate Giacalone and Ben Katz, two of our Product and Growth leaders. Thanks to Matt Luizzi, our Business Analytics lead. Thanks to Saif Islam and Sarah Bunting Lamos, two of our WHOOP Unite business leaders. Thanks to Carly Ward for protecting us on all of our legal questions. Thanks to Tina Stokes for managing front line support with our customer support team. Lastly, thanks to John Sullivan, Briain Curtin, Brian Kearney, Aoife O’Driscoll, Radha Bennett, and Tatiana Kuzmowycz, several of our marketing leaders that have helped bring this to life for our members.