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Strategic Pricing for Start-ups,
   New Products and Innovations


                         Rich Mironov, CMO, Enthiosys
 ...
Agenda

•   Introductions
•   Basics and theory
•   Thought experiments
•   Quick case study




    © 2009, Enthiosys Inc...
An Unapologetic Product Guy

• CMO at Enthiosys, agile product mgmt consultancy
   – Business models/pricing, roadmaps
   ...
Enthiosys Services




 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000
                    ...
“Pricing is almost never
               about the number.
             It’s about the model.”


© 2009, Enthiosys Inc. All...
Bottoms-Up or Top-Down?

• We‟ll be focused on market pricing (bottoms-up)
   – “What the market will bear?”
   – Consider...
Where Does Pricing Fit?
• Price is rarely the headline
• Part of the business model
   – How do we make money? Revenue/pro...
Company Approaches

• Big companies that do serious pricing analysis
   – General Mills, Goldman Sachs,
     United Airlin...
New and Mature Markets


                                              Outside                   Compete
                 ...
Pricing Your Start-Up

• Why will customers buy?
   – Make more money, save money
• What‟s the natural unit of exchange?
 ...
Think Like a Customer

• Customers buy products to…
   – Make money, save money, reduce risk
   – Promote themselves, feel...
Business Model Framework
A framework of interrelated choices that help you
create offerings that provide maximum value.

 ...
Customer Commitments




No commitment                                                                         Big commitm...
Avoid Creating Pricing Problems

• DON‟T…
  –    Make price the primary issue (usually)
  –    Over-complicate the sale
  ...
Agenda

•   Introductions
•   Basics and theory
•   Thought experiments
•   Quick case study




    © 2009, Enthiosys Inc...
Exercise: Consulting Services

• Your last start-up just closed, so you are
  suddenly a consultant. A prospective client
...
Possible Objectives

• Work at any price
   – Food on the table
• Loss leader
   – Underprice first assignment, get follow...
Some Consulting Pricing Models

•   Per hour, no limits
•   Per project
•   Per hour with project ceiling
•   Fixed price ...
Risks in Consulting Models

                                                       Client’s Risk              Consultant’s...
Workshop Exercise: Teleportation

• Founders: Stanford physicists with local VC
• Software plus expensive custom hardware
...
Easy to Get Starry-Eyed

•   Pick one segment to start (not 20)
•   Assume uninformed prospects
•   Products don‟t sell th...
Agenda

•   Introductions
•   Basics and theory
•   Thought experiments
•   Quick case study




    © 2009, Enthiosys Inc...
Case study: iPass

• Founded 1996: new market, new application
   – Falling asleep in Tokyo hotel
• Early clearinghouse fo...
iPass Transaction Model
                        ISP, PTT,                                                     Customer Sit...
Evolution of iPass Pricing Model

1. Cost-plus pricing (mark up each POP 40%)
   – Buy-side prices are visible
2. Flattene...
Network Effect: Strategic Leverage

• Early: low volumes, high supplier
  prices, difficult purchasing
   – Grow user base...
Software Value Exchange Models

•   Time-based access (e.g. unlimited/month)
•   Transaction (stock trade)
•   Metered (se...
Group Exercise

Nominate a start-up‟s software application
Tell a user story
   –    How does customer define value?
   – ...
Pricing Take-Aways

• Market pricing starts with audience‟s pain
• Pricing model aligned with pain
   – Units make sense
 ...
Strategic Pricing for Start-ups,
   New Products and Innovations


                         Rich Mironov, CMO, Enthiosys
 ...
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SDForum Strategic Pricing For Start Ups

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How to think about pricing new services and innovative products from the buyer's (customer's) point of view. For SDForum's Start-Up SIG and Marketing SIG

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Transcript of "SDForum Strategic Pricing For Start Ups"

  1. 1. 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
  2. 2. Agenda • Introductions • Basics and theory • Thought experiments • Quick case study © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 2
  3. 3. 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
  4. 4. Enthiosys Services © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 4
  5. 5. “Pricing is almost never about the number. It’s about the model.” © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 5
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. New and Mature Markets Outside Compete threats, on price Mature late- 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. Agenda • Introductions • Basics and theory • Thought experiments • Quick case study © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 15
  16. 16. 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
  17. 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 © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 17
  18. 18. 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
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. Agenda • Introductions • Basics and theory • Thought experiments • Quick case study © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 22
  23. 23. 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
  24. 24. iPass Transaction Model ISP, PTT, Customer Site hotspot Internet iPass Global Transaction Centers iPass Settlement System © 2009, Enthiosys Inc. All rights reserved. www.enthiosys.com or 650.528.4000 24
  25. 25. 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
  26. 26. 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
  27. 27. 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
  28. 28. 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
  29. 29. 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
  30. 30. 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
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