Skip to main content

Outlier’s Path

Pricing Strategy & Cost Advantages

Pricing and packaging were recurring themes in recent board conversations. These are critical topics, as pricing and packaging initiatives can significantly increase profit margins. Madhavan Ramanujam and Georg Tacke share a wealth of knowledge in their book, Monetizing Innovation.

One of the major myths is to build it, and they will come. Even if they come, it is not true that they will pay. Ramanujam and Tacke would advocate designing your product around the market, the customer’s willingness to pay, and the price(s). While that’s nice in theory and may work for our second product, we already have a first product. How should we price that product? Instead of speaking to customers or testing pricing, a debate ensues around the board meeting that goes in one of two directions: (1) more margin is better, and we should raise prices, or (2) we need to capture the market, and pricing should not impede adoption.

Often, the conversation is biased by strong opinions of what worked at a completely different and irrelevant company. Sometimes, there is a small number of customer anecdotes or a spreadsheet exercise with many unconfirmed assumptions. Rarely is data presented about customer willingness to pay or the elasticity of demand to support either argument. Since this is an optimization problem, the lack of data about customer’s willingness to pay at different pricing levels is fatal error #1. Gathering the data, experimenting with various levers, and establishing a coherent and optimal pricing and packaging strategy requires work. Yet, all the tricks of pricing and packaging are moot without data.

Once we are comfortable with pricing and packaging, it is equally important to understand costs and our cost advantages. In the initial phase, a new technology is usually difficult to use, slow, and expensive, but it becomes ubiquitous because it is better, faster, and cheaper. The transformation could take a century as the combustion engine allowed us to move from an agrarian society to a more urban society. It could take decades, from mainframe computers to personal computers to mobile devices. It could be much less with Generative AI as it has shrunk the time and cost of company creation, as evidenced by Midjourney, which has a self-funded small team and a product attracting a user base of millions within months.

For many, moving upmarket and raising prices to increase margins is more palatable than lowering prices. When we lower prices, we want to know that many more customers will be willing to buy, so our margin dollars will increase. There is also the hard work of building a cost advantage to allow us to lower prices more confidently. History has shown that having a sustained cost advantage will enable higher margins or lower prices relative to your competitors. No one will argue against higher margins. With those margins, some companies will decide to invest in those margins to make a new modification of their product more affordable to a different set of customers and expand the market. Uber took Uber Black to the masses with UberX. Tesla also started high-end, from the Roaster to the Model S and then to Model 6.

Let’s optimize our pricing and packaging strategies with accurate customer data. At the same time, let’s also remember to develop a sustained cost advantage which gives us the optionality to keep higher margins or reinvest those margins to drive to ubiquity.