Your product’s price determines your business playbook

The price of products determines all other components of the business. This happens because price influences the number and type of available customers in the market (higher the price, lower the number of customers and the corresponding premium positioning that’s required).

This in turn determines:

  • the distribution channels you need to tap in order to reach the target market,
  • cost of customer acquisition,
  • cost and nature of sales and service process, and
  • all that in turn determines the organizational structure.

In short, setting the price of a product is akin to choosing a highly specific playbook for building your business.

Zone of business viability (adapted from Five Ways to Build $100 million business)

This tight relationship between price and business model suggests that a mismatch between the two means failure. The most obvious case is keeping the price low for a market that has a limited number of customers. The limited revenue opportunity means that a startup can easily get killed by costs. The other case is keeping a price higher for a market that has a very large number of customers. In such cases, competition usually drives the price down and a higher price usually means slower or no adoption of that product which can result in failure. ...  Read the entire post →

What people pay for something is determined by its perceived alternatives

It’s hard for people to know how much they should be paying for a particular product. Evolution has trained us to be skeptical of strangers’ claims. By default, people will always feel they’re getting ripped off. So, instead of evaluating rationally, people resort to their gut feeling, which is informed by the perceived alternatives for the offering. Hence, the positioning of a product becomes the main criteria by much price is judged by people.

Where does your product lie on the value-price 2×2 matrix?

But it’s also the other way around. Especially for new brands, price serves as an anchor to the customer for deciding which category to slot the product in. For example, the price of a newly launched car slots it either in the luxury or the mid-range or the budget market. It matters less if the car is actually luxury or not, but if the price of the car is similar to Mercedes or BMW, the expectations of the consumer and their willingness to pay will be similar to Mercedes or BMW. ...  Read the entire post →

Generating profit requires creativity

Businesses don’t exist to make revenue, they exist to make profits. But the lure of revenue is hard to resist. It’s natural to admire the billions of dollars that big US retailers such as Guess, Macy’s, Radioshack and Toys R Us generate every year but it’s difficult to digest that they are in terrible shape because they’re not making any profit. These retailers are expected to close thousands of stores and fire many tens of thousands of employees. What went wrong?

Competition eats away all profit

You may have heard of this before, but a sure-shot way of making revenue is to offer $110 for $100. If you open this business, you’ll have no problem attracting customers and you’ll not even need to do any marketing (except when a new competitor springs up who offers $120 for $100). This example may seem worthy of nothing more than a chuckle but this business model is actually very common. Large eCommerce players in India (Flipkart, Snapdeal, and PayTM) grew by essentially handing out money to customers (in the form of discounts and cashbacks). ...  Read the entire post →