In the previous article in this Growth Metrics series, we looked at the value of a product ecosystem and the way to productise an offering into a complete solution. Now it’s time to turn our attention to the price and packaging of that product ecosystem.
Well thought out strategies for pricing and packaging are essential to the growth of a business:
1. Allowing your product ecosystem to cater for a range of different client types and personas, and adding depth and layering to your offer.
2. Building an ecosystem that pulls clients gently towards you.
3. Ensuring that your business is selling at margin – across it entire product range.
As we saw in the previous article, product pricing (driving revenue) is a function of the value you deliver to the client.
When a business can clearly articulate customer value, and has an in-depth understanding of costs (in goods and time), it can determine the margin it makes on each and every product.
Margin = Revenue – Cost
Profit = Volume x margin
A business’s products can sit in one of four places:
1. Low volume, low margin (we call this an ‘ugly business model’)
2. High volume, low margin
3. High margin, low volume
4. High margin, high volume (we call this one ‘Apple’)
When we are looking at pricing and packaging, we need to look at each of our product offers in terms of the value that they create for the client, and what the client is prepared to pay to receive the value.
Often we’ll need to look at different ways to deliver the value, so that we can create products that sit in categories 2, 3 and 4, and not 1. In order to work out how to create a high volume, high margin product, you first need to learn to create a high volume/low margin and a high margin/low volume product.
A Balanced Pricing Ecosystem
Once we have a thorough understanding of cost drivers, we can design a portfolio of products and prices that delivers a well-balanced ecosystem. An ecosystem that includes a careful balance of lower value, lower cost products and higher value, higher cost ‘core’ products.
A readily visible example of this ecosystem is in the airline industry, with first, business, premium economy and economy offerings. All offerings are on the same plane and get to the same destination at the same time – the differentiation is in the experience of the journey.
Every element of the service has a good, better, best level of service defined, to ensure that the differentiation is maintained from the minute the passenger leaves home to the moment they arrive at their destination. In building their pricing strategy, the airline works hard to understand each category persona, and what they value, in order to configure each element of the flight accordingly.
So whilst all passengers will be offered a meal, there is a strong differentiation in the food and wine offered, the timing of the meal, the amount of choice, and the presentation. All passengers have a seat – the difference is whether they sit upright or lie down. All passengers are offered the chance to freshen up – some with a hot towel, some with a shower. Based on these differentiators, each group of passengers will have a different experience on the same flight.
If we go back to the 3 growth metrics we explored at the beginning, we can see that this structure
a) Gives us access to a range of clients
b) Gives us scope to pull clients up the value chain (upsell)
c) Ensures that we are generating margin, whatever the client is spending
In a world that is moving to an online and offline environment, the next issue the airlines must address is how to generate online product offerings. Most high volume offerings will sit in the online world. Airlines usually have a massive database - but they haven’t yet worked out how to leverage and productise that database.
Building analogy – transitioning a traditional offline business to offline and online
One of my clients, Newmark Constructions, has cleverly created a software tool that can estimate the build costs for a new house, based on your lifestyle choices. You complete a questionnaire that uses an algorithm to calculate the cost per M2 for the style of house you are most likely to choose. By using the tool, potential clients are able to get a close estimate of what they need to budget, prior to committing to a design that may exceed what they can afford. This solves the problem that many architects experience when designing a house and aligning budget expectations. The tool is an example of an offline business (construction) creating an online tool to help address a problem and extend the scope of their product ecosystem.
Pricing cannot be underestimated as a strategic tool for growth – with a smart approach, it supports a wide range of clients, offers opportunities to move them to the premium product and delivers all-important margin.