Earlier this week, I was invited to hold a lunch-and-learn at the Regent Park Centre for Social Innovation. The topic was about Social Enterprises - and how even though their mission is to better the world, ultimately they are still enterprises. They owe it to their cause and their constituents to generate revenue. In other words, that they need to make money. We discussed money mindset, finding something to sell, confidently pricing offerings, and more; the core tenet was this: sometimes social enterprises confuse funding with revenue. The two are quite different, in terms of the impact they have on your business. It strikes me that there are many founders in other sorts of startups who might benefit for a refresher on this, also.
In short, these are the key differences between funding (be it from investors, or from lenders), and revenue (money generated from selling something - a product or a service:
Funding is the fuel. Funders provide it on their timeline, not yours. It has the benefit of using other people's money, but also the drawback: once they own a piece of your company, their power and motivations can force you in directions you didn't intend. Use funding wisely and judiciously, as it can completely obscure the reason you initially started your business.
Revenue, on the other hand, is the generator. It is the engine that creates power in your business to make decisions, to choose your direction, and to invest in the future. It provides operating costs, which funding is often not intended (or allowed) to cover. Assuming you're working at selling and you understand your sales cycle, you generate it on your timeline. You get to harness this resource, and direct its use to your chosen purpose. That means the money serves you and your business - not the other way around.
So, whether you're a social enterprise, or a pure-play for-profit company, make plans for revenue, and take control of the future of your business.
I'm Megann Willson, and I'm one of the partners here at PANOPTIKA. That means "see everything", because we work with our clients so they can see everything they need to know to make better business decisions. You can also find us on LinkedIn, on Twitter, or on Facebook. If you have a challenging customer project, give us a call and let's talk about how we can help. And if you'd like to see more content like this every week, click the button below.
What you believe your product is worth, isn't always what the customer wants to pay, and especially if they're a multinational corporation, and you're...not.
It's often tempting for service businesses to think of their pricing as simple units of money by time, for example, and that's what the purchasing people would like to believe. It makes it easy for them. And to be sure, someone will always price their services that way. But in a knowledge-based business, clients are also paying for your experience - your ability to understand the situation from a specific perspective, or as Steve Pulver, the speaker at last night's #Medventions session at Sunnybrook Health Sciences Centre described it, your ability to "see around corners". That's why you need to build a value story that they can understand. You need to avoid the price spiral. It's the same thing if you are building a complex new technology, or a medication. "Cost plus" is not the right model for either of those things.
So how do you decide how to set your price? There are a few simple rules of thumb. You do still need to start with costs. What does it cost to produce the product or service (raw materials, manufacturing, time researching, meeting, writing reports)? What are your overheads or fixed costs (rent, salaries, keeping the lights on)? Beyond that, you will need to look at competitors. Their pricing will give you a good idea of what the market will bear, unless your aim is to be much cheaper (because you've found a way to do that) or faster (there should be a premium for that) or higher quality (maybe, just maybe the customer will pay for that). Those are all good places to start, if there's a known benchmark. What if there's not? What if you're doing (or you've invented or discovered) something completely new?
Then you need to start with the costs, above, and begin to think more abstractly about your value proposition, what the product is worth, and what levers you can work with. If you have a medical device, for example, start by thinking about other similar medical problems that are addressed in terms of the incidence and prevalence of the issue, the number of patients impacted, the cost of not treating (the "opportunity cost"). You'll need to use some triangulation if there isn't readily available data. Then the real work begins.
Consider these questions when you're setting your price, and thinking about what customers will pay...
How serious is the pain? Is it more like an annoying itch, or is it a raging migraine? Thinking about how serious the pain is, will allow you to think about how much the customer will pay to solve it.
What is the consequence of not solving the problem? (How big is the risk to the customer? If it's a medical problem, can it be fatal, or permanently disabling?)
How far in the future will the consequence occur? (It's really hard to get someone young to understand why they might want to pay for life insurance)
And lastly, how often do they have the pain? If it's episodic, occurring at regular intervals, but never really going away, they may not pay as much (in between, they can live with it). If it's chronic and severe at the same time, they'll keep paying and paying for relief (in which case, maybe a subscription model is a good idea). And if it might only occur once - but the risks of not solving it are extreme, you need to make all your money at once, and they just may be willing to pay a premium.
It's not always dollars by time. Pricing is a much more complex story than that. But it's worth spending time to figure out. In fact, your business depends on it.
I'm Megann Willson and I'm one of the Partners here at PANOPTIKA. We help our customers in complex businesses to see everything they need to know to make better decisions, so they can build and grow. You can also find us on LinkedIn, Twitter, and Facebook. Or you can sign up for regular news you can use, with the handy button below.
Everyone wants a bargain, even you. But think back to the last time you went shopping for something important, or where quality mattered. You probably looked for the best price, didn't you? Then you looked at other models or versions that would do the same job. Eventually, you may have even settled on something slightly (or a lot!) more expensive. Why? Because of value. There was something about that other version you eventually bought, that you valued more than low price. Low price is, and always has been, a race to the bottom. If you compete only on price, and not on value, someone will provide a solution that costs less than yours.
So what to do? In our 5x5 Sharper Focus Business challenge, we prompt participants to think about one strategic question every day, like what is the value you deliver, that will ensure your client or customer is willing to pay more for what it is that you sell? Bain and company studied the elements of value, to take the guesswork out of it. They found there was a pyramid of value, much like Maslow's Hierarchy of Needs. Customers want value in one of four areas:
Megann and Steve, Partners in PANOPTIKA, are working for our clients every day to help them see everything they need to know to make better decisions in their complex business environment.
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