Lateral Capital Management, LLC

Price Up! Price U!

Across perhaps 100 different categories now, we have learned that pricing is broadly underused as a strategic tool for companies of all sizes. Early Stage companies are particularly under-skilled when it comes to using price as a strategic tool. A few thoughts:

  • Your pricing structure tells buyers how to think about your product. We recently saw a promising new beauty care brand with retail prices of $6.95, $8.95, $10.95 and $18.95 – and with two SKUs at $31.95. Forget the category or the competitive price points: This price range sends no consistent message to retailers or consumers about how the brand should be perceived. Ending prices in $.95 says you sell at Target; any single item above $30.00 says Department Store beauty counter. How you “design” your prices shapes how people will see your brand.
  • Higher prices can be a confirming aesthetic. If the product really works so well, why price it below competition? You beg the question: If you are so good, why are you so cheap? If the company described above added a dollar per package at retail (taking half to gross profit), and priced the entire line at $13.50, and the products delivered consistently on their promise, why wouldn’t consumers buy more?
  • How you price depends on where you sell. Somehow, a false idea has crept into the CEO toolkit: That you can only have one price for your product. The Robinson-Patman Act notwithstanding (ask your lawyer), prices for successful products vary all over the map. People don’t seem to “hate the brand” simply because it is priced differently in different channels. Consider Coca-Cola.

As you can see in the chart below, the price per ounce of Coca-Cola varies by a multiple of 8 or 10 – from Costco in cans to fountain product at the movies. And yet, we have come to accept this variation because we understand that there are tradeoffs in every purchase occasion – from the convenience of a 7/11 store to the fact that you have to pay a “membership fee” to buy soft drinks at Costco. The point is that even in a world of perfect internet information, if there is a good reason for different prices by channel, you can change what you need to:

Price is only part of your value proposition. The long-time leader in the Southeast grocery market, Winn Dixie/Bi-Lo, went bankrupt again – with perhaps the lowest prices in the market. Also, they had old, dirty stores, rude employees and so on. By contrast, Publix is the most profitable, fastest growing traditional grocer in the U.S.; with prices about 20% above Walmart. Also, with floors so clean you can eat off them, a high level of customer service and one of the oldest pricing schemes in the book. They offer steady, high margin everyday pricing – offset by frequent Buy One/Get One Free deals. These very compelling occasional offers give shoppers the emotional salve they need to pay high prices every day for everything else. “Wow, what a great deal.”

Price can be a confirmation of quality. See the ad here from ArtisTree, a lawn care contractor. Nowhere in this ad does the company claim that their lawn care work is superior to a competitor. Rather, they say straight out that they are more expensive – and by how much ($3.75 per homeowner per month). They let the Target Buyer – Homeowner Association managers and Boards – convince themselves that ArtisTree must be better. Why? Because they are more expensive.

Okay, you say. But I don’t sell consumer products or any product. I sell a service! These principles apply to non-consumer products as well – and to every service business. Here’s a recent software example from one of our Lateral-invested companies, with some details disguised:

Acme Health Research Software sells a SaaS product to the pharma research industry. Current users loved the product, but the company was having trouble getting new customers. They couldn’t afford to do any marketing and their sales commissions only allowed them to hire half-good sales reps. In late 2016, the founder stepped away from the day-to-day management, and was replaced by a new CEO with industry experience. His first act: Double the price of the product. This allowed him to put in a new richer sales compensation system, replace the sales staff with better people and invest in developing new product features. The result: software bookings have nearly quadrupled – and they have lost very few “old” customers.

Once again, the lesson here is not to take your pricing as a given. Think of it as one more testable element of your overall value proposition.