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 →

Marketing needs to deliver more than it asks

There’s typically an information asymmetry between what sellers know about their products and what buyers know. From buyers’ perspective, while engaging in a potential purchase, they never have enough information to know whether what they’re getting is worth the cost (in time, money, effort) that has been asked from them. Even when the seller gives information about the value the buyer will get, buyers suspect because both honest and dishonest sellers say similar things

Success = At all times(Benefits > Cost)

So for new products, as buyers can’t tell good products from bad products, they typically end up wanting to pay (in time, money, effort) much less than what the seller demands. In many markets, this drives away good, honest sellers leaving only dishonest sellers (which further aggravates the mistrust). The most famous example of this is used cars market, but some version of this plays in all markets. ...  Read the entire post →

People evaluate emotionally and then rationalize their decision

Many evolutionary psychologists believe that reason evolved to justify our actions to strangers. This justification was necessary because strangers couldn’t take one another’s claims at face value. Such claims had to be backed with reasons to convince the other that one is not taking advantage of him/her.

Heart beats brain

As we all know, actions speak louder than words. And emotions drive our actions.

Even though the capacity to reason is a highlight for our species, most of our decisions are made emotionally. Who we fall in love with isn’t rational but we can always find good reasons to justify our choice of partner. Similarly, our reasons for choosing to use certain products or services have a strong emotional factor, even though when asked, we will happily give rational justifications for the same. ...  Read the entire post →

All new products compete with Instagram for attention

You get pitched by other companies all the time. It’s estimated that we get to see thousands of ads every day. How many marketing messages from yesterday can you recall? If you’re like most people, it’ll be difficult for you to recall even a single message. At best, if you stress hard, you’d be able to recall only a few ones.

Nobody loves marketing messages

If you, the marketer or the entrepreneur, cannot recall ads or marketing messages you were exposed to, how do you expect your customers to do so? 

Marketers spend a significant amount of time creating their campaigns, so they become biased into assuming that if their target customer sees the ad, she will remember it and take action whenever the need for the marketed product arises. But that’s not how customers’ minds work. They see an ad and move on with their life as if nothing happened. ...  Read the entire post →

Assume most people are lazy but market to those who aren’t

Most of us are lazy. We do not wake up every day trying to actively seek new ways of improving our lives. We prefer the comfort of things that are known to work for us. That is why we frequent our favorite restaurants, watch our favorite TV shows and take our favorite routes to the office. Even though we like to think we’re not comfort-seekers, our actions usually speak otherwise.

Most of us are risk-averse when it comes to trying something new.

Find your marketing beachheads

However, some of us are truly adventuresome. If you’re not someone who is comfortable trying the new-new, you may have a friend who prefers to go to newly opened restaurants with no ratings. Such people are early adopters and as the name suggests, they take pride in being among the first ones to try something new and are seen as a tastemaker among friends and community. ...  Read the entire post →

Market leaders get killed by non-competitors

As an entrepreneur, you worry about customers all the time. And you’re correct in doing so. Focusing on customers is obviously important but customers will never ask you to introduce switching costs, which are precisely what you should do in order to continue making profits.

To anticipate future competition, keep an eye on the habits of your customers

Once you’ve been able to build a defensible business by building a big moat, you can pat yourself on the back. Your business now won’t get killed by competitors.

You’ve successfully thwarted risks from direct competition but your business is now likely get killed as collateral damage to something else where you weren’t even a player. Microsoft Windows had an absolute monopoly on personal computing and that’s why Linux or Mac OS didn’t impact its growth. What weakened its grip, however, was the shift of computing from the desktop to mobile phones that accessed services running on cloud servers (none of which were running on Windows).  ...  Read the entire post →

Never stop creating network effects in your business

A business is said to have network effects if each new customer increases the value derived by all other customers. Take a telephone network. Each new customer with a telephone line helps increase the value of the network for all other customers because now more people can talk to each other than before. Contrast this to other businesses such as the appliances manufacturing business. It’s obvious to see that if I sell one toaster, none of my other customers benefit from that sale.

Network effects, once triggered, become unstoppable

A business with strong network effects gains a competitive advantage over time because new entrants have to start from scratch and a customer choosing between two alternatives will go with the one that delivers more value, which is often the one with stronger network effects. Because businesses with network effects keep attracting new customers who make such network effects stronger, these businesses soon become almost impossible to beat in their category. Think Facebook, WhatsApp, and Instagram.  The value of these apps is not in the technology they provide but in your network of friends using them. ...  Read the entire post →

Do what’s hard (because everyone’s doing what’s easy)

Business opportunities that seem easy, or those that require minimal effort or investment are easy for everyone (and not just you). Most people naturally gravitate towards work that’s easy, enjoyable, or sexy. This is why you have so many entrepreneurs make mobile apps because coding an app is fun and relatively easy. 

Appeal and competition is inversely related

Real advantage, however, lies in doing what others aren’t willing to do.  Such work is either really hard, or takes an enormous amount of time or requires enormous capital, or is extremely boring or is unsexy. The fewer number of competitors in these less popular domains usually translates into a much higher chance of building a profitable business. ...  Read the entire post →