When Should Startups Think About Pricing?

An article we liked from First Round:

It’s Price Before Product. Period.

Over the second half of the 1990s, Porsche hatched plans for a new car.

Annual sales were a third of what they’d been the decade prior, so the company badly needed a turnaround. The car hit the market in 2003.

A decade later, Porsche sold 100,000 of the model in one year — nearly five times as many as it did in its launch year — which accounted for half the company’s total profit. This enabled Porsche to eventually pay down its debt, increase its cash reserves and generate the highest profit per car in the automobile industry.

What was this impactful, new product?

It wasn’t a sports car, for which Porsche is famed – not, for example, the sexy Porsche 911 that can effortlessly hit 200mph. Instead, it was the Cayenne: Porsche’s family-friendly SUV. How did the carmaker find this degree of impact with a vehicle so counterintuitive to its brand?

In this case, it wasn’t Porsche’s engineering prowess or manufacturing efficiency, but how it designed the car around what customers needed, valued and were willing to pay for – in short, around its price.

Building around price is the best path forward according to Madhavan Ramanujam, a board member and partner at consultancy Simon-Kucher & Partners. When it comes to this pricing expert, investor Bill Gurley may capture it best: "Madhavan Ramanujam is to monetization strategy what Bob Marley is to reggae music. He’s managed over 125 projects for companies ranging from hot startups to the Fortune 500, many of which he writes about in his recently published book Monetizing Innovation. He advises companies on several topics including new product monetization, acquisition and growth strategy, pricing strategy, packaging and bundling strategies, and price implementation. He’s essentially the price whisperer."

Drawing from his talk at First Round’s CEO Summit, Madhavan Ramanujam explains why pricing is so paramount from the get-go and the four ways companies often trip up when trying to monetize. He also shares the three guidelines that startups should follow in order to properly design and price their products. Let’s get started.

Why Pricing is Key From The Get-Go

Porsche knew it was taking a tremendous risk by building an SUV, veering from its traditional wheelhouse of sports cars. So the company focused on benefits customers were willing to pay for. The result was a car perfectly designed around features customers wanted, like larger cup holders, at a price they were willing to pay. All the items customers weren’t willing to pay for, like Porsche’s famous six-speed racing transmission, were thrown out, even if their engineers loved them.

On the other hand, Fiat Chrysler in 2009 badly needed a hit in the compact cars category, and focused its development process on engineering and design, settling on a price for the car at the very end. The company even bragged in advertisements that “it was ‘kicking out the finance guys’ from the development process. They worked to design, build and rethink, and repeated that cycle over and over until engineering thought the product was good to go. Money was not an issue and compromise was not an option. The ad shows the company building prototype after prototype to get it right,”

Ramanujam says. “Market performance was a disaster. It performed so poorly it eventually forced the company to issue temporary layoffs. Even though Fiat Chrysler was six times larger than Porsche, the company failed to craft a hit. That’s because the company thought about product first and price last.”

“On the other hand, Porsche’s masterstroke was thinking about monetization long before product development for the SUV was in full speed, then designing a car with the value and features customers wanted the most, around a price that made sense. The result was total corporate alignment: Porsche knew it had a winner, and had the confidence to invest accordingly,” Ramanujam says.

Porsche is not an outlier. The vast majority of companies are under some kind of price pressure, and need to create new products and features — and make money off of them— in order to survive. In a 2014 study conducted by Simon–Kutcher, about 80% of respondents said they were under price pressure. About 60% even said they were in a price war. The top way companies planned to respond to price pressure was to...