Your pricing strategy can make or break your company

I’ve been very busy recently working with several clients, one of which needed strategic assessments of entering the Smart Grid market. And a big part of the assessment had to do with the pricing model for this new vertical.

As you can imagine, pricing model has a direct impact on the top-line, the bottom-line, and sales volume, and can effectively make or break a company – or make it float around in mediocrity, as is sometimes the case.

Before I get into details, I should say that I have no background in consumer goods where pricing is a whole different beast to tackle. I have no idea how the following applies to consumer goods, though I suspect the general principles apply to business uniformly.

Market-based vs. cost-based pricing. Amazingly, some companies still base their pricing model on their cost. Here’s my comeback to this concept: whether a product costs you $100 or $1,000, if the market pays $800 for it, that’s where you should price it. Otherwise you’re either leaving money on the table or pricing yourself out.  If you can’t make the desired margins, you need to create value, change your target market, or change your offering.

Creating value. The market pays for value, and you can’t expect it to extract the value from your offering without your help. Every target demographic needs to be considered in creating the value. Whether it’s the ‘cool’ factor, functionality, reliability, time-savings, cost-savings, or otherwise, clearly communicate the value to each set of your demographics. Products don’t sell themselves, people sell them – and they do it by creating value. Tactful positioning comes in handy for creating value. Apple is a company that consistently does a great job at creating real value (great products) plus perceived value (cool factor).

Competition. It shouldn’t be a surprise that if there’s little competition in your market, you can charge higher for your products and services. Needless to say, you need to continually monitor your market for competition. And if your market finally does get targeted by competition, value creation will help you edge ahead of them.

Price wars. Alternatively, in markets with a lot of competition, it’s easy to fall into the “price war” trap. This is typical in commoditized markets, or those in which innovation has worn off (like the PC market). The best way to avoid price wars is to add value, reposition, or accelerate innovation. Without continued innovation, value eventually wears off. Sometimes it’s not worth staying in a market with continual price wars, and it’s best to get out. IBM got out of the PC business mostly for this reason.

Growth markets vs. established markets. The general rule is that growth markets afford higher prices. Market excitement, lack of competition, and the general “first to anything” mentality with growth markets allows for higher prices. Don’t be afraid to use this to your advantage. Eventually, with additional players and sizzle fatigue, prices will go lower.

If in doubt, start high. If you’ve been in the business long enough, you probably have a pretty good idea of the price the market will bear, but in new verticals, this can get tricky, and sometimes it becomes difficult to figure out a good pricing model. When in doubt, start high. The market will quickly let you know if you’re overpriced and you can always lower your prices, but increasing your prices will be much more difficult.

The market talks back – only if your price is too high. As I mentioned, the market will quickly let you know if you’re overpriced. Here’s the trick, it will hardly ever tell you if you’re under-priced. You could be happy selling high volumes of your products not realizing that you’re leaving 20% on the table. How about implementing a better pricing model that will increase your top-line by 20%, or add 50% to your net margin?

Life-cycle pricing. This topic deserves its own article, but it’s important to keep an eye on the market as the product or service grows, picks up momentum, and nears its “end of life”. The product or service needs to be actively re-priced throughout its life-cycle from launch, mid-life, to end-life. For example, production costs or support/maintenance costs could be much higher for older products or services, causing the margins to deteriorate with lowered pricing. Continual business analysis can bring this to light in order to shelf older products and services, and charge more for newer ones.

Lastly, don't be afraid to charge higher for your products and services. Create value and don’t leave money on the table. Remember, you can always lower your prices, but increasing them is much more difficult.

I’d love to hear your stories of pricing genius or mishaps.

Smart Grid Dynamic Pricing: Behavior Change Easier Said than Done

You might be wondering why you’re hearing so much about smart grids and smart metering lately, and what the big deal is. The big deal is that the ramifications of “smarting” US’ electric grid systems will touch upon multiple aspects of business and policy from consumer protection, to federal budget allocations, and most relevant to the readers of this blog, the opportunities it will provide for high tech companies providing services and technologies. And the show has just begun.

I was asked again by TMCnet.com to write another article about Smart Grids. It’s sure to ruffle some feathers, particularly for the players in the smart grid markets, but that should be expected about opinions about any new market with new technologies.

I’d be interested to see what everyone thinks. Here’s the link to the article.

Note to Apple: Pssst…. This is what Commoditization Looks Like

When I was at college in the 80s (whoa, did I just give away my age?) my brother who had just graduated from college bought a brand new PC. Price tag: $2000. That’s $2000 in the 80s when the consumer had a comfortable choice of brand new cars well under $10,000. Which begs the question, how come cars are so expensive these days? But I digress. This isn’t about cars.

Back to the PC. I asked my brother to jog my memory and he couldn’t remember its exact configuration, but he did remember that it had no hard drive, worked off of a floppy disk (720K?), with a wild guess of 8K of RAM (not 8M, 8K!).

The price of a fully loaded Dell laptop in 2009: as low as $445. I won’t even get into the details of the configuration. You can practically carry your life on the cheapest laptops these days. My brother’s old PC couldn’t even handle my college reports.

That’s what commoditization looks like.

When HP launched its first DeskJet printer in the late 80s, it was the least expensive non-impact printer introduced to the market, and it ran at 2 pages-per-minute (2ppm). Price tag: $995 (again, in the 80s dollars).

For $1000 in 2009, HP sells a 30ppm networked printer with full color capability and fancy paper handling.

That’s what commoditization looks like.

Granted, there’s a huge difference between the hardcopy (printer, copier) and the PC business models. While PCs provide very little residual income for manufacturers, hardcopy equipment manufacturers count on “per box” toner revenues of at least double the MSRP of the box, more for color printers (aptly named the razor/blade business model).

Fast forward to Apple’s iPhone.

When Apple launched iPhone in 2007 (seems like much longer than that, doesn’t it?), it was the edgiest widget of the century. This time it wasn’t just the “Apple heads” that lined up around the stores to buy one, everyone wanted an iPhone. Price tag for an 8GB iPhone: $599.

Last week Apple announced it will sell its 8GB iPhone for $99, and it’s guaranteed to have a lot fancier features than the original iPhone.

Yeah, you got it. That’s what commoditization looks like.

Note, the steep price drop occurred a little over two years after the original iPhone launch. Products and services are getting commoditized faster and faster due to globalization (from cheaper development and manufacturing costs), shortened product lifecycles, and increased competition.

What’s happened is that iPhone finally has a venerable competitor in Palm Pre (remember Palm, the original widget king?). Palm Pre has compared well against iPhone, and it won’t be long before Palm and others launch even more competitive products driving iPhone prices much lower. (And they’re all guaranteed to offer “cut & paste” too! Honestly, what’s that about?)

Apple has been through this before. Its original Apple computer fell victim to PC’s popularity where Microsoft and PC manufacturers’ strategy of incremental improvements and continual price drops kept Apple’s market share perpetually at or below 10%. This time it’s different. Apple’s “one two” punch with iPod and iPhone will keep the company’s momentum forward for a while. And the business model for iPhone is similar to hardcopy products. Residual income from AT&T’s subscriptions and a massive library of third party software and iTunes revenues will keep the business model healthy for quite some time. But with tense competition both on the product price and subscriptions, expect Apple's revenues to start showing signs of erosion.

In the meantime, consumers will enjoy lower prices for handsets and service subscription costs, more advanced features, and more manufacture and service provider options to choose from. Welcome to commoditization!

Which brings me back to this: how come cars are so expensive these days?