My biggest nightmare if I ran a startup, and what I would probably do about it
“The strategy and tactics of pricing” is the toughest book I’ve ever read. Not tough as in boring, what most books regarding finance, accounting, law, programming, and other subjects I’m bad at end up being. But tough like Chess, you have think more than a few moves ahead. The fun part about chess is that it’s a game and you can fail without much pain, but with Pricing… it’s better not to make too many mistakes.
Picture this nightmare scenario, an example I just read about in the book [paraphrased]:
A large building products manufacturer is operating in a commoditised market, but has continuously been profitable due to banking on perceived technical excellence and exceptional customer service. Still, market share has been going down due to aggressive price cutting by competitors.
How would you address this problem? Well, this is what the new management of the company did:
Whenever an account was seriously threatened, sales manager were authorised to negotiate “special deals,” that would retain the business at lower, but still profitable prices. It seemed successful, and market share increased by a few points over the next few quarters.
But what happened in the long-term?
The company tried to minimise damage, by not making this a public policy. But still, customers eventually ended up talking and found out that other customers got the same quality and service for less. Worse, those customers that negotiated by threatening to go to the competition, were the ones that got the lowest prices!Long term effects were that customers decided to no longer get “taken” by the company. Whatever previous loyalty existed, eroded, and customers opened up their doors to competitors, which had previously been closed. The company had ended up creating a financial incentive for its buyers to become more informed and less loyal, and customers responded.
Something that seemed like a smart move in the short-term, had turned into a nightmare over the long term.
Now the book goes on to say that any strategic move you make, pricing wise, must be one that weighs the short-term vs. the long-term consequences. The difficulty is that pricing is an area often dominated by sales people, who use the sport-analogy in doing business: “there can only be one winner, and it must be me!” Pricing, as the example above shows, isn’t just about winning in the short-term however, it’s about operating in a triangular fashion, respecting your bottom-line, understanding what your customer needs, and dealing with the competition. In the words of the book, it requires a “diplomat,” rather than a general to manage this area of strategy.
Reading this book would probably take 1 month full time. It would take ca. 3 months total to understand what is being said. And it would probably take another 3 months to try and implement it in your business. No sane CEO / startup founder would have time learn this stuff! They’re busy enough managing other aspects of the business, such as cash flow and people. So what I would do, if I were the founder of a startup and wanted to master pricing strategy [and you really should], I would hire an intern and make that his job: take 1 month to read the book, take another 5 to develop a pricing strategy for our business.. Then, if successful, hire the kid as the pricing strategist for your company. I’m 100% sure that it will pay itself back and now consider pricing as one of the corner-stones of any company’s strategy.
This was just a brain-dump. Love to hear your thoughts on this.
Vincent
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Indeed Vince, product positionning (and hence pricing) is one of the toughest aspects of the job.
After thinking about it for half an hour, I’m not entirely sure whether my solution of “just reading the book” is the best one. There is always a learning curve with new companies and you can’t just generalise strategies across industries. There are some important methodologies in the book, whose mastery helps in developing pricing strategy though.
Ok, into the teaser but I don’t think pricing is their only problem, attacking this is a semi-solution –>
To sum up
1.If you do away with structure and authorization in the pretext of serving clients you get run into by them.
2.Plus you shouldn’t punch your major asset, not even half of it (techno-relational excellence in their case)
I did not completely get the level of autonomy that the Sales people had, and if the company ever had the choice to compete through diversification. Let’s take the arrogance thing as given, can’t learn an old dog etc..
I also wonder why they ever chose to start-up in there (so maybe you shouldn’t worry until your company is really mature) : the product was commoditized, pricing-compete was vulgarized in the market… a real nightmare but panic is no solution. From solid you need to pass to liquid and more hard-corily to vaporcloud. but to me structure is always there
exit scenarios
The Chinese did it by “massive”. In your company’s case, they could partner up with their competitors.
Buckman (Magnatunes) did it by “customersourcing pricing”, but still structured one.
Both could work in a transitional scenario to preserve reputation until the company redefined its core elements (product, market,profession)
HR wise the intern is cool, he/she would sponge-in all the mess, take responsibility to buzz “childish” solutions that could prove fantastic, cost almost nothing…
a bit of humor to end this endless comment : A Greek would hire as interns all the children of his customers…
As far as choice is concerned, I think there’s much less of it than you imagine. Frequently these types of companies are started out of an “old job,” meaning that choice is already limited, and it eventually expands into a company. And by that time the only thing you can do is try and differentiate yourself.
As far as autonomy is concerned, I think sales people in this example had pretty much complete freedom to negotiate prices, as long as it wouldn’t erode profitability, i.e. exceed the cost of production. One solution that the book suggest is establishing “policies,” like “we lower price, but only against less service, or against a long-term contract.”
Nice exit strategies (and quote
), in the book, one company does something interesting. After analysing its segments, it ‘allows’ the competitor to operate in the least dangerous one, by raising its prices there. At the same time, it builds up its strengths in other higher value segments, slowly eroding the advantage the new entrant had.
Did I mention that I love this book?
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