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©2004. All rights reserved.
[email protected]: 650.315.7394
SVPMA Workshop: Strategic Pricing for Start-
Ups, New Products, Innovations
Rich Mironov27-March-04
©2004. All rights reserved.
[email protected]: 650.315.7394
“Pricing is almost never about the
number. It’s about the
model.”
3
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
4
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
5
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)
6
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
7
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
8
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
9
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
10
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?
11
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?
12
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
13
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”
14
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
“by
the d
rink”
“by
the
month
”
15
Commitments for Everyday Services
Things we commit to…1. ?2. ?3. ?
Things we buy “by the drink”…1. ?2. ?3. ?
Why?
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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?
17
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
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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
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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
value
20
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
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iPass Transaction Model
Internet
iPass Settlement System
iPass Global Transaction Centers
Customer SiteISP, PTT, hotspot
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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
23
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…
24
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…
25
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
26
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
27
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
28
Presentation
Target audience Pain (cost of current solution, limitations) Unit of pricing/metric Reason to use this solution Specific price(s) you picked Why
29
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
©2004. All rights reserved.
[email protected]: 650.315.7394
SVPMA Workshop: Strategic Pricing for Start-
Ups, New Products, Innovations
Rich Mironov27-March-04
