How do I price the unknown?
With every company trying move up the ladder in the space they operate, Companies are under tremendous pressure to bring out unique CVP (Customer Value Proposition) and in turn unique bundle of offering faster than their competitors. This often forces companies to ramp up its investment in productizing the IP, service offerings etc. and there comes the crucial market mpacting decision making question of “What should be the right pricing &methodology for my newly developed product/service for which there is no identical product/service offering that exists currently in the market”?
In the Tech space, emerging companies are able to wrap their heads around the route they want to go with great degree of certainty – Saas model, Paas model, One-time license, Monthly charges etc.,. The bigger question executives often lands in dilemma /unsure is “What should be that right price with which I go-to-market”?
We all know about few methodologies that’s commonly followed in these cases and the pros and cons of each of the pricing methods. It could be Cost-plus pricing, Value-based pricing, Market-based /Competitor pricing etc., or pricing the product somewhere in between. The point of discussion here are certain other factors which are often ignored but would have long term impact.
Here are some thoughts to consider:
Using new IP (intellectual property) as accelerators vs. Product in market place – Tech companies need to carefully evaluate if its more beneficial from revenue growth/Enterprise value via multiples perspective, whether to use the new IP as true accelerators internally to enhance delivery of current service to customer or to productize your IP in an already overcrowded market which is struggling to bring out true and distinguishable differentiator in the industry.
Understand the Stage of the product– In a practical world, a product that promises to be 100% functionalwith every bells and whistles needed that solves every problem a customer would encounter – is a myth. Pricing for certain group of identified early customer needs to be more strategic and price could be as low as what the customer is willing to pay provided it allows building IP back into the company. (Tip: Setting clear expectation upfront with customer, avoiding over promises about product functionality, architecting contingency plan for execution etc., helps in maximizing value).
Balance out Internal excitement vs. Customer needs – It’s a common phenomenon at startup/growth stage tech companies to easily get distracted with tons of functionalities that an over-excited executive think they can add to the product/IP often undermining the basic question “What minimum gaps do I truly eliminate to solve the customer problem’? Answering this question helps you to optimize product functionality, impacts pricing and provides wiggle room to react to the market better.
Understand the dynamics of your product’s “True-user” – If your product’s ultimate users are a specific group in the organization (Example: CIO/his team members) and in the initial stages of selling your new product/pricing such product, understanding theinternal dynamics/political atmosphere may be very helpful for the initial success while justifying your value proposition. Example:Evaluate – Is your product/service offering is bundle of efficiency item that it’s going to be disruptive to existing customer staff (creates fear of loss of job in team’s mind or challenges their conventional process)? In reality, there is lot of educating and convincing that needs to be done with those “true users” if your product needs to be adopted in such scenarios. A upfront and careful evaluation of such possibility, helps companies to position and price appropriately to garner some initial wins.
Internal readiness -When it comes to timing on product positioning, tech companies often tend to overlook if there is integrated readiness internally between various department such as PMO, Finance, Accounting and Legal to do their piece of support undertaking new product or service.
Keep exit timing, Enterprise Value and potential acquirer in mind –If you are nearing a stage in your company’s life cycle where you might become a potential target to acquisition soon, price your product /IP keeping in mind thelong-term value to potential buyer at the price you set and maintain. A price too high now which the potential acquirer cannot integrate and sustain with its product will have counter effect on enterprise value.
Train the sales team to convince value to customer– especially as the customer is unable to have a direct comparable, budget for new commitment etc. Getting this right is crucial and companies tends to often ignore the cost and impact side of this game while pricing the product.
Remember, pricing a new product /service is always a balancing act and management need to make a trade off decision considering various factors just like any other corporate strategy.