The Best Way To Price Your Product Is To Prove It Works
This is not a story about moths or sex. It’s about the future of your business. But let’s start with the moths.
Across North America, orchard owners are fighting a desperate battle against the codling moth. At the larval stage, these voracious predators tunnel into apples, pears and plums, where they snack on the seeds and ruin the fruit. Left unchecked, it could destroy 80 per cent of a fruit crop.
Science is fighting back. One of the most popular defenses against the codling moth is “mating disruption.” Farmers place pheromone dispensers around their orchards that spray out synthesized scents like those released by female moths to attract amorous males. Result: the male moths get confused when they can’t find their mates, and fly away unsatisfied. Generations of larvae go unborn, and farmers increase their crop yields while minimizing use of pesticides.
But synthetic moth hormones are expensive, so farmers are getting help from Semios, a Vancouver-based tech company that covers orchards with wireless sensors, mini-cameras, pest traps and pheromone dispensers that enable fruit growers to monitor conditions throughout their property and trigger their scent sprayers through a computer or smartphone.
“Semios is the most complex company I know,” said Steven Forth, a serial entrepreneur and co-founder of Vancouver-based TeamFit. Its array of data, collected through its proprietary communications systems, give farmers more information, and control, than they’ve ever had. As a result, Forth told a recent Toronto conference on pricing, “They get an annual subscription price of US$180 to US$260 an acre.” How do you like them apples?
The theme of this conference was “Future-proofing your revenue model.” As I noted last week, the conference’s first half dealt mainly with the psychology of pricing. The second half was more complex, exploring the growing links between pricing, data and the emerging Internet of Things, or IoT.
When people start discussing machine-to-machine communications, I usually leave the room. But Forth’s moth story caught my interest. IoT isn’t just about collecting more data – it’s about creating knowledge and aggressive new pricing models based not on guesswork, but on understanding exactly how your product or service creates value.
“Pricing should be based on how the customer gets and perceives value,” Forth said. He predicts data-driven vendors such as Semios “will sweep across all industries.” As the IoT creates a new world of data-driven decision-making, the companies that generate the highest profit margins will be those that can prove their products work and demonstrate exactly how much value they create.
For instance, Forth said, the value of paint isn’t found in the size of the bucket, but in how much wall area it will cover. “You have to know your value drivers. And you have to know how to extend your data model to capture the data you need for better pricing.”
If your head’s not spinning now, it should be. “We’re going into uncharted territory,” noted conference organizer Augustin Manchon, a Toronto-based pricing consultant. “The Internet of Things is an amazing platform for discovering new pricing models no one has ever used.”
Brendan O’Brien, co-founder and chief evangelist of Philadelphia-based Aria Systems, contends the IoT will not just create new businesses, but also new opportunities to sell. Aria helps companies develop recurring-revenue models, like Semios’s, turning what might have been a one-time service into a contract.
Businesses that chase single sales spend a fortune on customer acquisition, and then another on customer re-acquisition, O’Brien said. By developing recurring services for your customers, you create “not just one transaction, but a textured relationship around hopefully infinite future transactions.”
As an example he cites Netflix, which leveraged online streaming to change the video-rental business into a value-priced annual subscription model. Last year, Audi launched beta-testing in San Francisco for “Audi on Demand,” a premium, app-based car-sharing service.
Then there’s Amazon.com’s much-derided Dash Button, a handheld branded “clicker” for Tide detergent, Kraft Dinner, and other consumer staples. The device connects with your home WiFi network; when you’re about to run out of a product, you “click” the button and Amazon will rush out a replacement, usually by the next day. (The service is not yet available in Canada.) While many pundits have laughed off those clunky clickers and the narrow consumerism they represent, O’Brien said Amazon is developing “a tethered, ongoing relationship with its customers.”
He contends every company should be developing recurring business models. Identify the data that drives your business, then figure out what additional knowledge or services you need to hook your customers to a steady drip of your product. “You have to be fast and agile to deal with the changed services landscape,” O’Brien warned. “We are about to embark on the greatest competitive landscape of all time. You don’t have five to seven years to do something and bring it to market.”
Rick Spence is a writer, consultant and speaker specializing in entrepreneurship.
Source: Financial Post