©2004. All rights reserved. rich@mironov.com Tel: 650.315.7394 SVPMA Workshop: Strategic Pricing...

www.mironov.comrich@mironov.comTel: 650.315.7394

SVPMA Workshop: Strategic Pricing for Start-

Ups, New Products, Innovations

Rich Mironov27-March-04

“Pricing is almost never about the

number. It’s about the

model.”

www.mironov.comrich@mironov.com

Agenda

Introductions Where does pricing fit? Philosophies, approaches, objectives New and maturing markets Exercise #1: Long distance calling Exercise #2: Consulting engagement Case Study: iPass Exercise #3: New product, new market

Rich Mironov

VP Marketing, AirMagnet Wi-Fi management software start-up, Sunnyvale 42 employees, 1,800 customers, profitable

Valley veteran (since ‘81) Big company product mgmt: HP, Tandem, Sybase Start-ups: Wayfarer, iPass, Slam Dunk, AirMagnet

15 years product management, mentor consulting

Monthly “Product Bytes” column

Where Does Pricing Fit?

Price is rarely the headline Part of the business model

How do we make money? How much? Revenue/profit/shipment forecasts

Supports core value proposition “Our product/service saves you $$$$…” …and we want 20% of the savings

Often an obstacle to buying Too complex Much too high (sticker shock) Much too low (desperate, unprofitable) Free (no reason to trade up)

Company Models

Big companies that do serious pricing analysis General Mills, Goldman Sachs, United Airlines

Big companies that don’t Nearly everyone else

Small companies built on a pricing strategy SalesForce.com, NetFlix, Skype

Small companies without a clue

Philosophies and Approaches

We have the data, resources and commitment to do serious pricing analysis Patient and scientific

The market defines pricing models and prices Small fish, big pond

We have an explicit pricing strategy But little data

Our costs and ROI requirements define prices Cost-plus

We can’t ship until someone picks a price

Pricing Objectives

FIRST… Don’t make price the primary issue Don’t over-complicate the sale Don’t require customers to be smart Don’t change prices too often

THEN… Support the business model/plan Reinforce benefit of products/services Pick natural units Make correct ordering easier

New and Mature Markets

New markets

Mature markets

New pricing models

Dominant pricingmodel

Outside threats,

late- comers

Compete on price

Let 1000 Flowers Bloom,

Darwinian

Exercise: Long Distance Phone Calls

How many pricing models for long distance?1. ?2. ?3. ?4. ?5. ?6. …

What advantage from each model? Which customers make telco the most

money? Least?

Selected Long Distance Models

Based on… Distance (miles) Location (area code, country) Per minute Per month Per month plus per minute Per call plus per minute Monthly minimum Same provider (Friends & Family)

And perhaps… First minute free Per byte? Per word?

Which Plan is “Best”?

AT&T One Rate

MCI Nat'Wide

10-10- 987

AT&T Unlim+

Per call - - 39¢ -Per minute 10¢ 5¢ 3¢ -Per Month - $5.95 - $29.95

Calls/Month 210 $2 $7 $5 $30100 $20 $16 $45 $30

1000 $200 $106 $450 $30

minutes average call

Calls/Month 2010 $20 $16 $10 $30100 $200 $106 $99 $30

1000 $2,000 $1,006 $990 $30

minutes average call

Why So Many Plans?

New players enter market Target specific usage patterns such as

Price-conscious heavy users Immigrants with families overseas

Gouge unaware customers AT&T keeps creeping up minimums

How to beat/cheat Visit friends with per-month plan Use standard LD plan to confirm call then per-call

plan to talk at great length Voice-over-IP

“Adverse Selection”

Customer Commitments

No commitmentHigh variable costs

Lower volumeUncertain usageOptionalActively manage costs

MUST KEEP MARKETING

Big commitmentLow/no variable costs

Higher volumePredictable usage

Required (cost of business)Low cost control effort

HARD INITIAL SELL

rink”

Commitments for Everyday Services

Things we commit to…1. ?2. ?3. ?

Things we buy “by the drink”…1. ?2. ?3. ?

Exercise: Consulting Services

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

What are your pricing objectives?

How to structure a project?

Risks for you? For client?

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

Possible Models for Consulting Project

Per hour, no limits Per project Fixed price for initial sizing

(“pay me to estimate”) Per hour with project ceiling Milestones (progress payments) Equity (pre-IPO stock) Customer sets value at end Shared savings (portion of ROI) Free (experience, reference, try&buy) Barter

Risks in Consulting Models

Client’s Risk Consultant’s Risk

Straight HourlyUnlimited cost,

quality, completionNone

Fixed project price (pay on completion)

Timely completionUnlimited effort, defining “done”

Fixed price milestones

Partial work not valuable, inspecting

Upfront analysis

Equity, portion of ROI

May overpay laterNo immediate cash

Case study: iPass

Founded 1996: new market, new application Falling asleep in Tokyo hotel

Early clearinghouse for Internet “roaming” How do I get on the ‘net when far from home? Built directly on Visa credit card model

Target: corporate travelers, “road warriors” 170 countries

20,000 dial-up numbers, 5000 hot spots…

IPO July ’03, $1B market cap

iPass Transaction Model

Internet

iPass Settlement System

iPass Global Transaction Centers

Customer SiteISP, PTT, hotspot

Evolution of iPass Pricing Model

1. Cost-plus pricing (mark up each POP 40%) Buy-side prices are visible Customers encouraged to use cheapest number

2. Flattened by country (then continent) Simpler – outgrew unique price-per-POP Some POPs more profitable than others Customers indifferent to suppliers Leverage moves to buyer (iPass) “Home” seems expensive, “roam” is a bargain

3. Overlay Home/Roam model What we learned from long distance market Charge less at “home” but more to “roam” Lots of “home” substitutes but few “roam” alternatives

Network Effect: Strategic Leverage

Maturing: dominant player connecting all major networks All major dial-up networks (BT, FT, DT, CT…) All major hotspots (T-Mobile…) Who wants to join 2nd-largest ATM network?

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

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

Software Models: The Real Fun

One-time license per copy Big corporate, desktop, home/SOHO Support or maintenance

Bundled with hardware Per transaction

Per byte, second, article, page, virus scan, auction Volume discounts

Rental Hosted or installed Per copy, seat, hour, Mbyte, website, e-store

Prepaid usage…

Exercise: Teleportation

Founders: Stanford quantum physicists Combination of software, custom hardware Early version has important limitations

Inanimate objects only -- no live transport Under 40 pounds, under 18” diameter 2000 mile limit High power requirement (15 kW) 45 second recharge time Destination +/- 6 inches

So far, only limited lab testing done Lots of VC money available

Not yet a product or service

No target application or audience No marketing or sales staff No go-to-market strategy No price analysis, no pricing model

Lots of (heavy) water cooler discussions

Assignment

Group: brainstorm target application(s)

Split into teams Build a value proposition Choose a pricing model/unit Justify a price Model’s risks to customer

Risk reducers? Pricing bells & whistles?

Present your solution

Presentation

Target audience Pain (cost of current solution, limitations) Unit of pricing/metric Reason to use this solution Specific price(s) you picked Why

Pricing Take-Aways

First goal is to avoid impeding sales process Occasionally, price as strategic advantage

Must support business model Think hard about target audience, pain Pricing model aligned with pain

KISS Savings >> price Units make sense Risk reducers

Invest in research if you can Competition, interviews, historical databases

SVPMA Workshop: Strategic Pricing for Start-

Ups, New Products, Innovations

Rich Mironov27-March-04

Time permitting: AirMagnet demo

©2004. All rights reserved. rich@mironov.com Tel: 650.315.7394 SVPMA Workshop: Strategic Pricing...

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