Pricing and Positioning for Entrepreneurial MarketersPublished: March 30, 2005 in Knowledge@Wharton
According to Wharton marketing professor Leonard M. Lodish, "positioning and pricing are the most important entrepreneurial marketing decisions that you can make. They are the two basic issues that are critical not only for the marketing of an entrepreneurial venture, but for the venture itself. Before you go out and raise a lot of money, before you invest in research and development, before you start spending serious money, you must find out if there is a demand for your product and whether or not you can price it so you can make money."
Lodish, who led a session on Pricing and Positioning for Entrepreneurial Marketers during the recent Wharton Marketing Conference, provided definitions, statistics and business case studies to illustrate his message. Using a wide range of companies, he pointed out that his positioning and pricing touchstones hold true for a major telecommunications company launching an international satellite-based cellular telephone (which failed when customers balked at the high minute-to-minute price) on down to a small bow tie Internet business operating out of Maine (a success story to which Lodish, wearing his signature silk bow tie, can personally attest).
"As an entrepreneur, can you develop a company that is going to have a long-term, sustainable, competitive, strategic advantage?" asked Lodish, who is a pioneer of Wharton's entrepreneurial marketing course, vice dean of Wharton West and leader of Wharton's Global Consulting Practicum. "That's the basic question that any business has to answer ... Positioning and pricing - it is all interrelated and intertwined to the success of your business."
First, positioning. "What am I selling to whom?" Lodish asked. "What should be the perceived value of my offering compared to the competition? Who is going to buy this? Where is my target? You have to integrate your positioning and your segmentation with a distinctive competence. What is going to make me successful over the long-term? What is distinctive about me that will be hard for my competitors to reproduce?"
Lodish pointed out that the customer will ultimately be the judge of the entrepreneur's efforts. "Sustainable value vs. the competition comes from distinctive competence - if and only if the customer perceives it," said Lodish. And how does that happen? Through any number of ways related to a product - ranging from technology, design, perceived high quality and exceptional customer service to reliability and reputation. "You have to make sure that you have something along these lines," said Lodish.
Once value is established, "the real key is finding people who will pay more for that value, and then reaching them ... How big is the segment? If you have limited resources, you can't afford to go all over. You need to go where people will value what you are offering, compared to the competition."
In positioning a product, Lodish suggested that entrepreneurs follow several key principles:
· Give someone a reason to buy your offering over the competition. "Ask yourself, 'Why should a member of the target segment buy my product or service vs. the competition's?'"
· What are the unique differentiating characteristics of my product or service (the incremental value vs. the competitors) as perceived by members of the target segments?
· Remember that humans cannot make decisions balancing more than two to four differentiating attributes at a time. "If there are six or seven of them, they will get lost," said Lodish. "If one thing really fills the value needs of customers, stick to that one. You will have an easy communications method, and you will be able to name your product offering based on that attribute."
· Features vs. benefits. "This is Marketing 101. People buy benefits, perceived value. They don't buy features. Unless you can show how the feature relates to a benefit, it doesn't do you any good. And it's amazing how many big companies make that mistake."
· Never underestimate the value of a good name and a good slogan. "Many people don't understand this," said Lodish. "If your name says why you are different and why you are different from your competitors, you've got yourself a good name." Some slogan ground rules? Be consistent; avoid clichés; take a stand; if you use numbers, back them up; be brief; have your slogan reflect your positioning or vision statement; and above all, make it your own.
Next, pricing. "Pricing is completely dependent on the rest of your marketing mix, especially positioning," said Lodish. "For those of you who already have businesses going, the big symptoms of pricing-marketing mix problems is what people always say is the 'commoditization' of their industry: That all customers what to know is what the price is; that customers begin to unbundle your services and perceive your product as 'just another bid'; that salespeople have to battle constant price objections. If that's true, you have a problem. Because you are not going to make the kind of money you want to make from that industry unless you get to the point where you are perceived as valuable enough - compared to your competitors - so that you can charge some kind of a premium."
That is why, Lodish continued, "I recommend premium pricing. Premium pricing means continually improved perceived value to customers vs. the competition. How do customers get perceived value? From everything they see about your company," which includes reputation, trust, design, brochures, sales force, web site, interactions with products, other customer's recommendations, packaging, and yes, pricing. "If you price too low, you ruin the product right off the bat," said Lodish, because consumers won't believe the product is credible.
Lodish nodded his head as an audience member shared a perfect illustration for the value of premium pricing. "We started a company selling built-in vacuum systems initially priced at $500. People just loved it, but no one was buying it. We started asking questions, and everyone said, 'It can't be that low.' We doubled the price to $1,000 and sales skyrocketed. It turned out that the consumer was right. The perception was that at $500 we couldn't be delivering a quality product."
Most entrepreneurs price too low, Lodish agreed. And when that happens, it's difficult to increase prices. "Special pricing to get first users is okay, but perception is all important. You must specify a regular price and structure 'charter discounts' or 'introductory discounts' early. Let them know what the regular price is immediately, because it's easier to roll it out after that. People think it's unethical, immoral to raise prices and they really get upset. The only way you can increase prices is to talk about the fact that your costs have gone up and you have to recover them. People may say, 'Wow, that's an expensive product;' but they won't say, 'He's a bad person; that's a bad company.'"
Setting the right price, however, isn't always easy, Lodish admitted. Entrepreneurs should recognize that perceived value determines demand curves, "which is standard micro economics," Lodish noted, pointing out that more than half of a recent survey of Inc. 500 companies used 'value-in-use' pricing as opposed to only 20% of non-Inc. 500 companies. "That tells you that one of the ingredients of successful companies in pricing is based on perceived value, which is typically going to be a premium price as opposed to a cost price."
One way to determine value-in-use pricing is to conduct market price testing. Simply stated, "You can go to different markets and try different prices. On the Internet, you can do it quite easily." Or, Lodish recommended, entrepreneurs can use concept testing.
Concept testing is defined as a research technique where one determines whether the potential user understands the idea of the proposed product, reacts favorably to it and feels that it answers a need. The primary purpose of concept testing is to estimate consumer reactions to a proposed idea before committing substantial funds to it. "The most important question you ask in concept testing is intent to purchase," said Lodish. "Would you buy this product? That's a very important question to ask. With a little bit of money, you can get a rough idea if someone is going to buy your product, and you can get a rough idea of the demand for it. If you want to talk to 50 people, you can get enough data to go to the next step in launching your company."
According to Lodish, concept testing is:
· Used to identify product failures without prematurely killing off promising new product ideas
· Used to separate good ideas from bad ideas before significant resources have been committed to development
· Especially useful for durables and B2B products
· Used to generate rough (but very valuable) price-volume demand curves for new products
· Relatively simple to carry out at a relatively low cost, and is extremely flexible to meet the needs of the entrepreneur.
Additional questions revolve around what Lodish calls the DEB factor: Desirability (to what extent is the concept desirable?), Exclusiveness (is it really perceived as exclusive?) and Believability (are the product claims credible?). The one question entrepreneurs should never ask, according to Lodish, is 'What's the most you would pay for it?' "Because then people will know that you are negotiating with them, and you will get biased answers. If price is considered, show only one price to each respondent. If you have four alternative prices to consider, you have every fourth concept price in the questions. But remember, you show only one price at any given time."
Data for concept testing is typically collected in any number of ways: through personal interviews at home, at work, or in centralized locations like a mall; over the telephone or Internet; or by mail or consumer panels. The most useful method of concept testing for pricing is "monadic testing," where a given respondent is exposed to only one concept and then gives a direct response, such as, 'I really like that,' 'I'd buy that' or 'I'd never buy that.'
"Another important thing to realize is that you can't take the numbers and then just run away with them," cautioned Lodish, explaining how to interpret the results of concept testing. "Purchase intent assumes a lot. And you must factor down the fraction of people who say they will buy it with the fact that not everyone is going to know about it, not everyone will be able to find it, and not everyone will buy it even if they say they will, which is what I call the 'being nice' variable. Be careful. It's not easy."
Lodish cautioned that there are limitations to concept testing. High on the list is the fact that concept testing "does not always predict market success." But it "is a lot better than nothing, and is typically a bargain, easily worth the time and expense in terms of its impact on the success of an entrepreneurial venture," said Lodish. "And the general consensus is that concepts tests are stunningly accurate, with a trial rate predicted within a 20% range, 80% of the time."