When thinking about the companies or brands you most admire, which come to mind?
If your list contain brands like Apple, Google or Amazon, you’re not alone. The frequently cited companies mirror rankings of the world’s most admired companies: Apple (#1), Amazon (#2) and Starbucks (#3), Southwest Airlines (#8) and Netflix (#14).
All these companies are associated with innovation, quality, service, scale and growth. But a less visible characteristic is that these companies are leaders of pricing. Price leadership is a key competitive advantage that is developed, improved and executed with precision.
More and more founders are finding out the hard way that pricing is critical to their startup’s survival and success. But pricing is hard because success is built on more than just setting a price point. It requires the right price delivery (monetization) and execution (sales and marketing).
When done right, the opportunities from pricing are substantial. Here are three reasons why the best companies who prioritize pricing separate themselves from the pack and win.
Reason #1: Better pricing is your best growth strategy
Here’s the worst kept secret all the best companies know: pricing drives growth.
I know what you’re thinking: “What? Growth?” Yes. Growth.
For the average company, a 1% increase in price can increase profitability by as much as 4 times more than a 1% increase in volume or a 1% decrease in costs.
In other words, better pricing can help you earn more money per sale/transaction and potentially over the life of the customer. This accelerates revenue and profit growth.
You’ve just increased your revenues and profit without selling another unit/product/service.
Better pricing also builds the foundation to sustained growth. The best companies understand pricing is more than identifying a price point, it also calls for successful execution of several critical objectives.
This starts with company leaders defining and communicating growth targets and market position aspirations. This is followed by execution and meticulous maintenance; from gathering pricing-centric insights about customers and competition, to building a winning go-to-market plan.
The opportunity? A company that’s geared to building and achieving sustainable growth.
Reason #2: Powerful market insights to build products
Pricing is a powerful market research tool, but too many companies ignore pricing in the product development process.
You’ve probably heard this story more than once - a startup builds a product and goes through customer testing and the results are through the roof. Then the product launches, and the strangest thing happens. No one buys it.
Fingers are usually pointed to high prices for the poor outcome, but as a founder or company leader, the real question is (1) why is the product price wrong; and (2) how can the product team catch pricing issues before a costly product launch?
HomeJoy, the Y-Combinator-backed home cleaning marketplace wanted to win the market using price. What can cost $85 for a 2.5 hour home clean, HomeJoy offered as a promotion for $19, which is 70% cheaper. There was much fanfare for the service and investor funding quickly followed.
Except the pricing was wrong. By a lot. When HomeJoy returned back to their original prices (ranging from $25-35/hour), customers didn’t see the value. Retention suffered and rather than increase perceived value, focused on a costly, and ultimately unsustainable, retention strategy.
Promotions and discounts perpetuated the pricing issue: customers did not find sufficient value to pay the prices HomeJoy needed to keep the business going. Sadly in July 2015, HomeJoy announced they were closing down after raising more than $30 million in investor funding.
This is why the best companies integrate pricing early into the product development process. Pricing not only offers insight into the potential monetary value of a product or service, but also the features that drive purchase-decisions and the education required to communicate the product’s value.
Earlier product development integration also helps companies like Apple and Amazon build better pricing and a go-to-market plan to support post-launch pricing.
These proactive steps defend against value dilution and enables companies to use discounts and promotions as a tactical tool rather than a reactionary measure for poor pricing.
Reason #3: Build strategic and tactical capabilities
There is a belief among startups that pricing can be changed or corrected in the future.
Unfortunately, this is often not the case. When there is little confidence in the pricing at launch, what usually follows is reactionary pricing led by anyone but the startup itself.
The best companies understand pricing enables future strategic and tactical decisions.
To help illustrate this idea, let’s look at one startup that’s achieved traction and scale: ClassPass.
ClassPass is a fitness class platform connecting customers with local health studios (e.g. yoga, pilates).Since it’s founding in 2013, ClassPass has raised more than $150 million, expanded across the U.S., launched internationally, and booked over 18 million classes. Yet the pricing story tells another tale.
ClassPass’ original offer was a single unlimited plan priced at $99. This plan was a hit with customers especially considering a single class off the platform could cost $30 or more.
It didn’t take long for ClassPass to recognize, however, that this model – price level and structure – was not sustainable. Over the subsequent 30 months, ClassPass made wholesale price changes three times, raising the unlimited plan’s price more than 100% before ultimately discontinuing this popular plan.
When prices are either wrong or poorly executed, corrections are painful and swift. Since the last major price change in November 2016, ClassPass replaced its founder and CEO. The company has pursued increased promotional efforts to retain and reacquire lost customers; creating a new set of discounted prices to manage.
Unlike the story of ClassPass, the best companies create strategic and tactical opportunities through proactive pricing.
Like the best sport strategists like New England Patriots’ head coach Bill Belichick, the best companies prepare and prepare some more to execute a game plan and have a clear plan of action of various situations.
Prioritizing pricing isn’t easy and is often not a common skill or area of expertise for many founders and leadership teams. But as market-defining companies show, pricing is a capability that’s prioritized and nurtured; creating a core differentiator and hard won competitive advantage.
Ed Lee is the Founder & CEO of HelloAdvisr, a growth consultancy helping companies accelerate growth through effective pricing and monetization strategies.