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

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” © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 3

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… © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 14

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? © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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) © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 21

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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 23

iPass Transaction Model ISP, PTT, hot Customer Site spot Internet iPass Global Transaction Centers iPass Settlement System © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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? © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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? © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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? © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 29

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 30

Strategic Pricing For Start-Ups

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