Monthly Archives: November 2013

Setting a Price: Six Points to Consider

Your R&D has gone well, and you’re approaching commercial introduction soon. You are probably reworking a spreadsheet to put some more detail into revenue models. You might be ready to engage on a trial with a lead cashReg_351840customer. Whether a first product, a new member of a portfolio, or the 100th product, setting price is arguably the most fundamental go-to-market decision you’ll make.

When you have existing products with a track-record in the market already, and you are introducing version five, you have a lot of data in hand and the choices are easier. That situation probably warrants a blog entry or two of its own. The discussion below will still have value. Primarily, though, these points are aimed at market entry for a new product in an untested landscape.

Your pricing strategy should consider these six points :

  1. Price-to-Market
  2. Price-to-Margin
  3. Discounts and Promos
  4. Price Evolution (contingencies!)
  5. Payback and Break-even
  6. Product Lifetime curve

Each will be discussed briefly below. But let’s preface that by saying that no one approach is going to give you the definitive answer. The best strategy is to work through each approach to see what it gives you, then consider an initial price based on the variables of your specific situation.

Price to Market
This is the dominant strategy used in consumer products and services. Basically this is the process of gathering data on competitive products and prices, and positioning yours within that spectrum based on your assessments (or ideally customer consultations) of quality. Thus if your data suggests your product is in the top 20% of products in the space, you can price within that range as well. One has to turn off their “my-baby” product bias here, and this is where impartial customer testing is very helpful. Given a range of prices for comparable products, tactical decisions can be made about targeting direct competitors with your pricing.

Price to Margin
Even if you feel that the Price-to-Market strategy has given you a concrete answer, you must do this analysis as well. This is where you look at your product cost, and add your desired mark-up, and see where it comes out. Again, you need to look at  percent_983490this in the context of the competition. Even if the product is in a new segment, if your product solves a problem for the customer, you need to consider your pricing against the current way the customer solves the problem.

Bottom line here is that if you cannot make a suitable margin on your product when priced against the alternatives (direct competitors or alternative solutions) you need to either go back to the drawing-board on the product design, or even consider whether this is a market you can viably serve at all.

Margins are a relative thing – industry data shows that a successful restaurant lives on an aggregate 4 or 5% margin, while a successful electronic product manufacturer can manage a 50-60% margin. Hopefully you know what to expect before you embark on addressing your chosen market.

Discounts and Promos
Given a stake in the ground to mark your price, the marketing strategy for the product or service is important as well. There are often product goals beyond selling an individual item (or service) to a customer in a one-time sales event. A successful company builds brand loyalty, develops relationships, and generally tries to add sale_1430736value to a customer’s situation beyond delivering a quality product.

Repeat customers mean long term business success through a lower cost-of-sales, whereas one-off customers mean you have to work just as hard for the first widget you sell as you do for the 1000th. Thus discounts and promotions are often a useful tool.

Your pricing strategy should clearly define where discounts can be applied and where they shouldn’t. It should define discount profiles that don’t decimate your ability to operate. They shouldn’t restrict your ability to make future sales by creating an expectation in the market that everyone gets 50% off all list prices.

Discounts and promos are particularly useful for ‘up-selling’ in encouraging a customer to consider instead of buying widget A at full price, getting widget ‘A’ at 30% off when it is purchased with widget ‘B’ and widget ‘C’ as well. But do the arithmetic to ensure that you do not craft elaborate money losing packages that cripple your business.

Price Evolution
Invariably market places evolve. Your product price is unlikely to be a static thing, and you should plan ahead for how it will change. Changes could be required based on general cost-reduction of producers, where competitors are able to reduce their costs and lower prices. Similarly, increased costs in means of production may start road_1428506to erode margins and required you to raise prices. A new entrant may aggressively attempt to secure market share by undercutting the field.

In all cases, decisions need to be taken in the context of market share, cost, margin and operational complexity. Does the cost of changing your systems negate any improved earnings? Will there be additional frequent changes required as well? Will a price-point war with a competitor bring you both out of business?

By anticipating the road ahead, and sketching your pricing boundaries you can survive surprises.  Recognizing that markets evolve is a prudent strategies. Keep in mind, and document your contingencies for responding to unexpected threats. If a new entrant shows up tomorrow with similar features at half the price, what is your response going to be?

Payback or Break-Even
When setting price, it’s important to consider the whole product lifespan. When the development costs, and end-of-life costs are added into your production costs, at which point in your product sales lifespan will you have paid back all costs? When will the product become obsolete, and will the cumulative profits of the product cover the original R&D costs, plus those in getting to market in the first place? Is=n that context is this still a product you want to introduce?

When setting initial price, do the work to model not only the margins you want to achieve on a per-unit basis, but also consider pricing that recovers full development and introduction costs at some number of months or years into the sales projections. A good rule-of-thumb to begin with is to seek payback one third of the way through the product’s market-viability period. Whether you wish to make that a quarter or a tenth will depend on your corporate expectations, and market segment. Expectations when making cell phones are going to be different than making wheel-barrows.

Product Life-time Curve
As a product ages in the market place, a prudent business is consistently researching ways to produce it more efficiently.

The typical approach is to lower costs of components and materials, incrementally improve performance, reduce waste and environmental impact in manufacturing, make processes and procedures cheaper and faster.

At some point, sales begin to wane and decisions are made regarding discontinuation. Pricing can be an effective tool in managing that curve. When chartUp_1131288margins are sufficiently improved, a product with a diminished customer-value can often take a position in a lower-tier niche. Perhaps as an entry-level product serving as a stepping-stone into your higher-performance products. Or perhaps it can serve a more price-sensitive off-shore market. Sometimes social benefits can be had by donating the now lower-cost model to cash-strapped non-profit businesses. Tax benefits are sometimes possible based on retail-price value, while bottom-line costs to your business for the benefit are minimal, while enhancing goodwill.

A few last thoughts…

Full Product Cost – remember that product costs are more than just the materials that go into individual units, or the cost of the labour and consumables during a service call. There are substantial costs related to the R&D expenses, the selling costs, the advertising and marketing, and even just keeping the lights on in the head-office. Understanding your costs of development, support and overhead are important facets of your pricing decisions.

Customer Cost of Ownership – Remember to look at the customer’s perspective. What are their other costs beyond the simple purchase of your product or service? If you can map out all costs, tangible and intangible, from start-to-finish, you can wallet_1160544better understand your pricing options. If your product reduces other costs for the customer, it can allow you to price higher than a competitor if you are able to articulate that value to the customer. You may also be able to ease other elements of the buying decision for the customer, which contributes to a stronger relationship.

Putting It Out There – Naming Your Venture

Your innovative new venture needs a name.

Forget for a moment the legal reasons, your venture’s name is an efficient, quick way for your customers and partners to remember you and your business. It is something you and they will say often, so it’s important and helpful to ensure that it encapsulates your market approach and helps to visualize the value you intend to offer.bizcard_sxc

Effective business naming is challenging for the entrepreneur.  It is wholly plausible that your skills at building and offering a great service or product might not be the same ones that help you find the best name for the business.  Finding a memorable, effective name means finding one that will help – not hinder – your success.  It’s a first step towards taking a successful product to the target market.

First let’s look at the purpose of a business name, and then how it will be used.

A unique name allows you to differentiate yourself from other businesses not only in the general business landscape, but also relative to those competing in your market.  It’s often the first impression a customer gets, and as such can convey some characteristics about your business quickly – for good or bad.

Fun, whimsical, serious, professional, elegant or irreverent, your business name will be a big influence on how you’re perceived.  Some customers will discover your business through your products, then seek your name for future reference. Others will hear about your company by word-of-mouth – hopefully in a positive context.

The word-of-mouth usage of your business name is particularly important.  Verbal referrals, especially for a small business unable to do a lot of advertising, can be your most important customer growth tool.

There are other factors, beyond those we’ll deal with here, to consider in naming. These include legal uniqueness requirements, registration and trademarks. As well, some businesses need to think about portability of the name to foreign markets and languages where the name may have radically different meanings or perceptions.

For our purposes though, let’s focus on these two fundamental questions: positioning yourself in the market, and being effective for your customers.  Here are FIVE simple rules for naming a business.

The first two rules are the best kind. You can break them. But think carefully before you do. These two simple concepts add great value in one of the most important areas – making it easy for your business to spread by word-of-mouth.

1. Maximum seven letters
2. Maximum three syllables

Anything that helps people remember your business and tell others about it is invaluable.  Or perhaps they’re passing on a bus and see your sign.   Maybe they walk past someone holding your product and have an immediate interest.  Will they remember the name long enough to look it up later?

In the early days of telephones, researchers studied peoples’ memories to see how many digits they could retain, and found that seven numbers was about the limit.  Sure, it’s not a directly transferable concept, but a seven letter limit similarly helps people remember the correct spelling of your business, particularly if you have a creative, non-dictionary, word as the name. Less is more.

You can find many businesses that break one or both of these rules yet still succeed.  They probably have a great product that allowed them to rise above, and gain solid brand identity during an early phase of the business.  But given how hard it is to succeed in today’s tough market place, why create a new barriers to overcome?  If you can do something to make the path towards name-recognition easier, why not do so?

3. Obvious spelling.
If a possible customer learns of your business by word-of-mouth, will they be able to search for it on the Internet?  What if the spelling is totally unexpected?  How quickly will they give up?cafemeet_sxc

Maybe your business sells sweets and someone enthusiastically tells their friend “You have GOT to try the peppermint candies from that shop called Sweet Candy.”  If the friend starts searching the web, they’ve got a problem on a couple of levels (see item 5 below)  If it turns out that the actual spelling of your business name is “Sue-Wheat Kandee”  they may give up long before they get a match.

Remember too that obvious spelling doesn’t have to be a dictionary spelling. More on that in rule five too.

4. Restrictive naming.
It’s a classic challenge that businesses sometimes unwittingly bind their future options by a badly chosen name.  It is not unusual for a business to serve a certain customer base and suddenly realize they have a great market opportunity adjacent to where they started.  This is a trendy word in new venture parlance – the “pivot.”  If your business name is very specific, it may limit your growth, and make attracting new customers difficult should you decide to do the P-word.

For example, you might begin as “Joe’s House Painting” but constantly hear that many customers can’t find a good carpet installation service – a skill you possess from your past.  Reaching those new customers with your existing name could be difficult.  As well, changing your name would cut you off from previous, very happy customers who will think you don’t do painting anymore.  Starting under a more flexible name like “Joe’s Home Services” might be a better strategy.  Maybe just “Joe’s Services” would leave you flexibility to evolve into non-residential services.wrench_sxc

Again, one can find exceptions where a business pushed through this barrier.  A great domestic example in our country is “Canadian Tire,” a large successful hardware, car-parts and service company.  They successfully transitioned to “more than tires,” thought that phrase was indeed their slogan for a while. How much did that cost?  Customers were gradually able to buy hammers and light-bulbs from the store that started out as automotive-focussed.  More recently, they tried to push it further, trying to offer food items like milk, and eggs and cheese in some stores, but they finally gave up.  Tires, hammers and eggs ultimately don’t go together in people’s minds – let alone in their shopping bags – and they appear to have abandoned that attempt.

5. Googleability.
Rule three already mentions that the spelling of your name should be obvious. You should also remember that most people are going to want to search the Internet to find or research your business.  Either to get your address, or phone number, to see customer reviews or to see your wares on your website. If your business name is simply “Home Services” the millions of hits generated will not be very helpful to that potential customer.  Having some uniqueness in the name will help with this.  Googling on “Tom’s Home Service” will be a bit easier. Even better would be “SpeedyTom” or  “Tom Works Wonders.”browsers_sxc

Creative name spelling will help too. But wait – remember rule three.  You can certainly get creative and try something like “Tomifaction” or “Housify.”  These are great non-dictionary words whose spelling can easily be guessed. This is branding gold.  People can easily google it and uniquely find ONLY references to your business.   This also gives you a powerful ability to track your marketing and customer activity too.  Your customers can find you quickly and easily. Just ensure you keep your creative spelling predictable.

Sixth of the Five Rules:  Testing
The best naming process is an iterative one – where you stop and test what you are closing in upon.  It’s easy to do a few tests on people around you. Say the name you’re considering and see if they can guess the spelling.  Google it and see if anything comes up (low numbers of hits, and in areas unrelated to your space is a good sign).
Test for domain name uniqueness – you might change your name when you find that housify is taken (it is).  Maybe something else would work.   This is a whole topic unto itself. (A quick-responding site like InstantDomainSearch is a pretty nice website for rapidly checking many domain names.  You’ll need to do that often to nail down one that is avaiable).

Coming up with great name ideas that meet these rules can be challenging, but there are some great techniques you can use to get there.  Contact us if you want some help on that topic.  Don’t expect to find one quickly – you should generate a big list. And don’t get married to a name right away, consider other options before you nail it down.

 

Product Timeline End-to-End

Many envelopes and napkins have been illustrated with portions and versions of the graphic below.  So it seemed worthwhile to capture this ‘product timeline’ in a structured way to aid in those discussions.  Throughout this blog and in many off-line places over the years, many of us will have debated and planned based on versions of these boxes and timelines.

ProdPhases

Various organization or groups of founders will have their own names for the steps along the path. Developers of a service business may have different approaches, but it’s arguable that all these elements are worthy of consideration in any venture built on innovation.

Debates can also be fueled by the alignments of the various boundaries. So let’s enable those discussions and make our planning purposeful.  An issue discussed is one for which we are better prepared. With the full spectrum of a project’s phases visualized, planning becomes easier.

Posts on this blog will seek to illustrate (and alter) this picture going forward. Your input and discussion is welcomed!

Feel free to use this graphic if you wish (please credit rossgk.ca for authorship in any publication/online post).