strategy

Increase Revenues by Applying Basic Pricing Principles

One of the most challenging areas for startups, especially business-to-business companies, is how to price their products or services. Everyone wants to win some early revenues to show investors, but no one wants to leave (too much) money on the table. There is no magic formula for pricing. I have though discovered some principles that can guide the process.

  1. No pricing strategy completely survives the first contact with enterprise customers. There will always be surprises. Price has to make sense to both sides. It is usually best practice to take the winding path to arriving at a price, rather than putting a price on the table right up front. It can help to do trial closes with different pricing elements, such as asking “if we did this deal do you have a view on what quantity you would purchase in the first year?” or “does your organization prefer to do long-term contracts with ceilings for annual price increases, or do you prefer to renegotiate annual contracts?”

  2. Pricing involves much more than the dollar amount the customer pays. Unlike for consumer goods enterprise sales usually have many more variables to work with, including: volumes, minimum quantities, annual price escalations, level of service provided, customization, integration, payment terms, quality or performance guarantees, and many more.

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Creating the Best Freemium Model

Many subscription services attempt to build their business by offering a Freemium Model, which means offering a free service to basic users while hoping a good share of users will upgrade to a premium plan and start paying for the service. The keys to success for this model are to maximize the conversion rate of customers who will pay, while keeping the free version attractive enough for customers to sample the service.

Companies experience a wide range of conversion rates, from Spotify’s amazing 27% to a more typical range of 1% to 4%. The conversion rate is a big driver of profitability, and finding a way to move from 1% to 2% is doubling the success.

The key is to design the model into the product rather than making it an afterthought. Think hard about how you will give your free users a great experience while educating and tantalizing them about what more they could get by paying the premium.

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Practice Pitches -- Much More Than Delivery

You have a great new business idea, you have built the minimal viable product (MVP), you have some initial revenues -- and now you want to raise some angel funding. What do you do next? Before you reach out and apply to every angel group in town, consider the following.

1. Determine how much you need to raise and the milestones you will hit

Founders “sell” milestones to investors and leave it to investors to ask themselves two questions: 1. Will this team hit these milestones with this amount of capital raised? 2. If they hit the milestones will they be attractive to the next round of investors?

Be cautious about how much money you ask for in this round. Ask for only enough to prove the next level of market and product traction, building in a bit of a contingency. If you shoot too high you may have to score with multiple angel groups, spend the next six months fundraising, and risking having to return the money if you do not complete the round.

2. Create your elevator pitch

Write a 30 second pitch that you could deliver in a ride in the elevator, with no props. Try it out on people and refine it until it is just right. This pitch could be your outline for your pitch deck, which avoids the common problem of including slides in a deck just because the writer already had some great graphics

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Strategy Statements - Avoid Getting Wrapped Around the Axle

Just about every company goes through a process of creating their vision, mission, and strategy statements. Start-ups especially must do this to attract investment or document their latest pivot. Sometimes the companies hire consultants. Sometimes they arrange a one- or two-day offsite meeting with senior management. Sometimes the CEO hands the strategy down to management.

Most of the time though companies end up with a big PowerPoint deck that contains many $100 buzzwords, describes their role in tectonic industry trends, but fails to come to a point. The leaders celebrate the completion of the document; they present it to management and staff; and everyone continues doing what they were already doing before the exercise.

Keep in mind that planning is important despite these misadventures. Dwight D. Eisenhower said: "In preparing for battle I have always found that plans are useless, but planning is indispensable." So by all means plan.

Here are my top seven guidelines for writing effective planning documents.

  1. Write a Strategic Intent Instead. Avoid the pointless discussions about what elements fit in the vision, objectives, goals, mission, values, or strategy documents. Write a single document that includes them all -- from where the company wants to go to how it plans to get there. Call it a Strategic Intent document.
  2. Keep it Short. Several good blog posts on the topic, including Forget the Strategy PowerPoint and The Art of Crafting a 15-Word Strategy Statement make a strong case for fitting the planning document on one piece of paper. That forces clarity and conciseness. And it is easier for the staff to understand.
  3. Make Choices. The reader should understand what the company will and will not do. Be specific about the success measures, target markets, time frames, technology platforms, make-versus-buy-versus-partner choices, and go-to-market channels.
  4. Solve Problems for Target Customers. The best strategies meet market needs, rather than describe actions in a vacuum. Meeting a market need requires specifying a target customer, a use case, some need or pain point, and how the company plans to meet the need. Otherwise, what makes the company unique?
  5. Specify Action. Passive voice kills strategy statements. Something important just magically happens? Good strategies describe clear action programs. 
  6. Leave the Tag Lines for Don Draper. Having an "elevator pitch" is helpful, especially if it ties in consistently and logically with the whole strategy. But a strategy is not the place to create the catchy, 2- to 3-word catch phrase. That is for the ad agency or the marketing types, once everyone agrees on the overall strategy.
  7. Plan for Phases. Just as Generals say "no battle plan survives the first shot being fired", strategists say "strategy ends when the team takes the first action, and the rest is tactics". Strategies should contain big dreams as well as near-term plans. Think big and act small. No one can predict the market or competitive conditions for phase 3, so there is no need to be highly specific about the strategy for that phase.