How to Nail the Pricing

ScaleX Ventures
Oct 24, 2019 · 8 min read
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Photo by Henry & Co. on Unsplash

Disclaimer: In this article, we tried to lay out fundamentals about pricing in general. As your Go-To-Market evolves, you need to excerpt fundamentals from this article and build your own strategy.

Pricing is a topic that can make or break any company at any level, however, it is not talked about enough. The reason for that is, pricing is seen as a art rather than science, this might be true but there are available data points that the ultimate decision can rely on.

According to a survey done by Simon Kucher (which is done on 1,650 companies across major industries in over 30 countries);

  • 65% of respondents said they were under price pressure.
  • 57% even said they were in a price war.
  • The top way companies planned to respond to price pressure was to release new products and services in order to survive.
  • 72% of these innovations did not meet their revenue or profit targets or even failed completely.

The two main goals of the setting a price are;

  1. Convince the customer to buy the product (Lower the better — to a point)
  2. Make money for the company ideally with high margins (Higher the better)
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The graph above explains the economic surplus which many executives are familiar with. The ultimate goal is to find that sweet spot, the equilibrium point that would maximize the company’s profits by having a low enough price to convince customers however the highest price to convince the customers to make more money in the meantime. Easier said than done.

Before going into how to do that, we need to look at what is being done in most companies now;

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Every company starts with a problem and build a product to solve the problem and when the product is ready, build a Go-to-Market Strategy and grow. In this scheme, pricing is just a minor step in the go-to-market strategy. This is broken because this does not include the customer in the process.

Tyler Gaffney explains this not including the customer in the process as the #1 mistake done by especially B2B startups.

How to find the right pricing and include the customer in the meantime?

Building the right pricing strategy begins by changing the pricing’s position within the company and its product strategy.

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We illustrate the process as linear to paint the picture clearer, however, all 5 are dynamic and could be considered as a continuous circular flow.

Pricing should be considered and talked with the customer even before the product started to be built. This is counterintuitive but if you think it through as; we found a problem that people/companies are facing and we are going to build a product to solve that problem and in the end sell it to those people/companies for $X. Finding a problem to solve is the first step, but validating a viable business opportunity and figuring out the pricing is the second.

The best example of this would be Porsche while developing Cayenne. Madhavan Ramanujam who is a Partner and Board Member at Simon-Kucher & Partners tells about Porsche’s as;

You might be saying, “OK, we understand the need to talk with the customer before building the actual product. But what we are going to say/ask them?” During the interview with the customer, pitch them the problem, the proposed product and also how this product will solve their problem and then ask these 3 questions;

  • What do you think is an acceptable price for this solution?
  • What is an expensive price for this solution?
  • What is a way too expensive price for this solution?

Patrick Campbell (Price Intelligently’s Co-founder and CEO) explains that the results should be interpreted as, “acceptable price” being the lowest price you should consider, otherwise, people may question the quality of the product/service, “expensive price” being the actual price you should use for your pricing and “way too expensive price” being the highest price you can put on the product but would decrease the conversion rate significantly.

Tyler Gaffney believes that 5–10 customer interviews are enough to be a base point for your pricing. Tyler also emphasizes the importance of defining the go-to-market strategy before deciding the pricing, because this also helps with maximizing the effect of customer interviews.

One-size-fits-all pricing actually fits no one.

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While setting pricing for your product and service you need to provide tiers for different customer segments to select and directed to their specific needs. However, Madhavan Ramanujam says to keep the number of tiers low; “Fewer is more. Start with 3–4 segments, then expand gradually until you reach the optimal number.”

Sheena Iyengar from Columbia University and Mark Lepper from Stanford University conducted research with shoppers. When shoppers presented with six jam flavors, 30% of tasters made a purchase. When 24 options were on the table, only 3% opted to buy.

Rafi Mohammed, Ph.D. (Founder of Pricing for Profit) suggests that 3 tiers should be available, Good, Better and Best. “I strongly advise against setting a Good price that’s more than 25% below Better, and I recommend that the Best price should not exceed Better by more than 50%.”

Tyler Gaffney explains that setting prices in stone and not in motion is the #2 mistake of founders.

In their book; Monetizing Innovation: How Smart Companies Design the Product Around the Price authors Madhavan Ramanujam and Georg Tacke mentions that “Sometimes the best product innovation is the monetization model itself.” The best example for that would be Michelin’s pricing strategy in the early 2000s;

How to deliver this pricing to the customer?

Delivering the pricing to the customer is also a sensitive topic, especially for B2B companies. Price Intelligently’s CEO Patrick Campbell says that;

However in the early days while discussing pricing with a lead, which also can be treated as a customer interview, deliver the price in person or over the phone to keep the feedback loop open says Tyler Gaffney. He adds;

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ScaleX Academy

Loads of entrepreneurial experience and plenty of practical…

ScaleX Ventures

Written by

ScaleX Ventures is more than a traditional VC. Not just invests financially but also operationally amplifies entrepreneurs.

ScaleX Academy

Loads of entrepreneurial experience and plenty of practical advices offered to scale your business.

ScaleX Ventures

Written by

ScaleX Ventures is more than a traditional VC. Not just invests financially but also operationally amplifies entrepreneurs.

ScaleX Academy

Loads of entrepreneurial experience and plenty of practical advices offered to scale your business.

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