Strategic Pricing For Start-Ups

Strategic Pricing for Start-ups,
New Products and Innovations

Rich Mironov, CMO, Enthiosys
SDForum Marketing/Start-Up SIGs
April 20, 2009

© 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
1

Agenda

• Introductions
• Basics and theory
• Thought experiments
• Quick case study

2

An Unapologetic Product Guy

• CMO at Enthiosys, agile product mgmt consultancy
– Business models/pricing, roadmaps
– Innovation Games® and customer needs
– Agile transformation, interim PM executive
• Repeat offender at software prod mgmt
– Tandem, Sybase, four start-ups
• Haas executive education faculty

• “The Art of Product Management”

3

Enthiosys Services

4

“Pricing is almost never
about the number.
It’s about the model.”

5

Bottoms-Up or Top-Down?

• We‟ll be focused on market pricing (bottoms-up)
– “What the market will bear?”
– Considering pricing models and specific prices
• Companies also need top-down
– Justifying R&D investments, projecting revenue
– “We need higher prices to hit break-even sooner”

• Iterative
– Intersection of market,
business model, costs…

6

Where Does Pricing Fit?
• Price is rarely the headline
• Part of the business model
– How do we make money? Revenue/profit forecasts
• Supports core value proposition
– “Our product/service saves you $$$$…
– …and we want 15% of the savings.”
• Often an obstacle to buying
– Too complex
– Much too high (sticker shock) or too low (desperate)
– Free (no reason to trade up)
– Wrong value exchange model

7

Company Approaches

• Big companies that do serious pricing analysis
– General Mills, Goldman Sachs,
United Airlines, Toyota
• Startups built on a pricing strategy
– SalesForce.com, NetFlix, ZipCar
• Companies that don‟t handle pricing strategically
– Nearly everyone else

8

New and Mature Markets

Outside Compete
threats, la on price
Mature
te- and
markets
comers features

Let 1000
New markets Flowers
Bloom

New pricing Dominant
models pricing
model

9

Pricing Your Start-Up

• Why will customers buy?
– Make more money, save money
• What‟s the natural unit of exchange?
– How do they derive value?
What does the competition do?
– Can you split off a profitable segment?
• What‟s your business model?
– Recurring software revenue, professional services..
• Test, trial-close, get your hands dirty

10

Think Like a Customer

• Customers buy products to…
– Make money, save money, reduce risk
– Promote themselves, feel important…
• How do they describe value?

• Quantify it for them
– Prospects don‟t have the time to do your homework
• Assume you can capture a fraction of value
– B2B: often 5% to 15%
– Consumers often driven by fashion, not analytics

11

Business Model Framework
A framework of interrelated choices that help you
create offerings that provide maximum value.

Customer Value Analysis
Identifies Value

Licensing
Type of Value Exchange
Terms and Conditions of Use
The way you make
money
Pricing
How much money you make Profit Engine
Causes More
Enforcement
Money-Making
Protection of Rights
Events

Customer ROI Model
Quantifies Return
12 12
® 2009 Enthiosys

Customer Commitments

No commitment Big commitment
High variable costs Low/no variable costs

Lower volume Higher volume
Uncertain usage Predictable usage
Optional Required (cost of business)
Actively manage costs Low cost control effort

NEED CONTINUOUS MARKETING HARD INITIAL SELL

13

Avoid Creating Pricing Problems

• DON‟T…
– Make price the primary issue (usually)
– Over-complicate the sale
– Require customers to be smart
– Change prices too often

• DO…
– Support the business model/plan
– Reinforce (charge for) key benefits
– Pick natural units
– Make correct ordering easier

14

Agenda

• Introductions

15

Exercise: Consulting Services

• Your last start-up just closed, so you are
suddenly a consultant. A prospective client
needs market analysis, MRD, a pricing model.

• What are your pricing objectives?

• How to structure a project?

• Risks for you? For client?

16

Possible Objectives

• Work at any price
– Food on the table
• Loss leader
– Underprice first assignment, get follow-on work
– Good reference for other clients
• Become indispensable
– Push for a full-time position later
• Gain market experience
– What will the market bear? OK to lose assignment

17

Some Consulting Pricing Models

• Per hour, no limits
• Per project
• Per hour with project ceiling
• Fixed price for initial sizing (“pay me to estimate”)
• Milestones (progress payments)
• Equity (pre-IPO stock)
• Customer sets value at end
• Shared savings (portion of ROI)
• Free (experience, reference, try & buy)

18

Risks in Consulting Models

Client’s Risk Consultant’s Risk

Unlimited cost,
Straight Hourly None
quality, completion

Fixed project price Unlimited effort,
Timely completion
(pay on completion) defining “done”
Partial work not
Fixed price
valuable, how to Upfront analysis
milestones
inspect work?
Equity, portion of No immediate cash
May overpay later
ROI value

19

Workshop Exercise: Teleportation

• Founders: Stanford physicists with local VC
• Software plus expensive custom hardware
• Some arbitrary product limitations
– Inanimate objects only (no people)
– Under 40 pounds, under 18” diameter
– 2000 mile limit, arrival +/- 3 inches
– High power requirement (15 kW)
– 15 second recharge time
– Non-military, non-government

20

Easy to Get Starry-Eyed

• Pick one segment to start (not 20)
• Assume uninformed prospects
• Products don‟t sell themselves
• Sell v1 until you‟re close to v2
Although some products need
“the vision thing”
• Describe benefits from
customer‟s POV
• Make sure it works

21

Agenda

• Introductions

22

Case study: iPass

• Founded 1996: new market, new application
– Falling asleep in Tokyo hotel
• Early clearinghouse for Internet “roaming”
– How do I dial into the „net when far from home?
• Target: corporate travelers, “road warriors”
• By 2004, covered 170 countries
– 20,000 dial-up numbers, 5000 hot spots…

• IPO July ‟03, $1B market cap

23

iPass Transaction Model
ISP, PTT, hot Customer Site
spot

Internet

iPass Global Transaction Centers

iPass Settlement System
24

Evolution of iPass Pricing Model

1. Cost-plus pricing (mark up each POP 40%)
– Buy-side prices are visible
2. Flattened by country (then continent)
– Simpler
– Customers indifferent to suppliers
3. Overlay Home/Roam model
– Charge less at “home” but more to “roam”
– Lots of “home” substitutes but few “roam” alternatives

25

Network Effect: Strategic Leverage

• Early: low volumes, high supplier
prices, difficult purchasing
– Grow user base, add more networks…

• Mid-cycle: can substitute suppliers, improve
quality, simplify end user experience
– Companies want biggest network
– Networks want most roaming users

• Maturing: dominant player
– All major dial-up networks (BT, FT, DT, AT&T…)
– All major hotspots (T-Mobile…)
– Who wants to join the second-largest ATM network?

26

Software Value Exchange Models

• Time-based access (e.g. unlimited/month)
• Transaction (stock trade)
• Metered (seats, CPUs, named users)
• Hardware (appliances, dongles)
• Service (virus updates, support)
• Percentage of incremental revenue/savings
• Data-driven insights

Charity?
27 27

Group Exercise

Nominate a start-up‟s software application
Tell a user story
– How does customer define value?
– Competing offerings?
– Adoption challenges, infrastructure needs?
– Validate a value proposition
– Justify a list price (quantity one)?
– Dimensions of discounting?
– Model‟s risks to customer, risk reducers?

28

Pricing Take-Aways

• Market pricing starts with audience‟s pain
• Pricing model aligned with pain
– Units make sense
– Savings >> price
– KISS
• Must support business model
• Complex pricing plans impede sales process
• Invest in research if you can
– Competition, interviews, historical databases

29

Strategic Pricing for Start-ups,
New Products and Innovations

Rich Mironov, CMO, Enthiosys
SDForum Marketing/Start-Up SIGs
April 20, 2009

30

Strategic Pricing For Start-Ups

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