One of the big issues that almost everyone I talk with is pricing.
“People won’t spend money,” goes one argument.
“If I get them in cheap, I can raise prices later,” goes another.
“Everyone is price sensitive,” goes another.
And, on and on from there.
The thing about this is that you are absolutely right in every case.
People won’t spend money on things that they don’t value.
Look at anything?
Would people pay for Facebook? I’m not sure.
Do we look at the secondary ticket market and see tons of tickets available for $1 or $2? Pretty frequently.
What about raising prices after the fact?
Sure, you can do that as well.
The problem comes in that you are going to have attrition. No doubt, and are you gaining customers that will never want to pay for your product or service on the front end to show user growth?
If that is the case, you are likely not going to be too successful.
Which brings me to Instacart.
Why do I want to talk about Instacart?
Because I have to wonder if their is a fatal flaw in their pricing model that is going to doom what is an otherwise great service for the right market.
If you are unfamiliar with Instacart: they are groceries delivered in 1 hour.
For me, the big issue is that they deliver Costco in DC. Which means I don’t have to spend 75-90 minutes commuting for Costco!
That’s high value to me.
But they have two pricing mechanisms in place, one which if it is supporting their ability to pay their staff has to be tremendously problematic.
You see, the prices on Instacart are higher than you would pay in the store. For Costco, I’m going to guess that in some cases 10% give or take.
Which for the stuff I buy, is still a tremendous bargain…at twice the price.
So I am totally fine with that.
Where I worry that maybe the pricing model isn’t going to work long term is in the area of a “service fee” that is set at 10%, but which you can wave at checkout.
Why does this bother me?
Because it says in the notes that this service fee enables them to pay competitive wages.
The concern for me is that if that service fee is the only way that you can ensure that you are paying competitive fee, why is it optional?
And, if it is optional because their is price resistance in the market, how viable is your business model?
I highlight Instacart here, but we have seen many other companies struggle with the all-in price versus the price breakdown structure.
StubHub struggling and going back and forth on how to list their prices being another one.
What this points to more than anything is a fundamental struggle between two ideas:
Viable business models and targeting the right markets
I know that as money has become tougher in Silicon Valley, start ups have had to be much more conscious of the decisions that they are making with investors’ money.
This has highlighted a lot of ideas that maybe sounded great at the outset, but which in practice have not had the consumer interest or capability to sustain a market for the long term.
Think about something like Kozmo.com from around 2000. A great service that lots of companies have stolen bits and pieces from and mainly because the idea couldn’t be done cost effectively at the time.
Now we have a lot of services and app based businesses that are falling into the same trap of delivering something that is great or seems great, but which people won’t pay for at market or full price.
This leads to the idea that if people aren’t willing to pay for something, are you misreading the market?
In many cases yes.
Consumer psychology tells us a few things about a buyers’ decision making process.
- Don’t discount: If you start discounting, you become a discount brand in your consumers’ mind and it will take you around 7 years to lose that mark on your customers’ mind. In regards to cheap customer acquisition costs, this likely puts you in a situation where you have trained your buyers that they never have to pay full boat for the service you provide them. And, when the inevitable happens, you have to raise prices and your customers flee and your have no more business.
- Positioning matters: If you are selling only a premium product, you have to be careful that you don’t position your brand as something for everyone. And, if you are trying to be inclusive, you need to make sure that you don’t send the wrong impressions to your buyers and prospects. You really truly can’t be everything to everyone.
Which brings us back around to targeting the right markets.
In working with professionals service firms, sports and entertainment organizations, and nonprofit development officers, one common theme comes to the front almost immediately in our conversations: a very unclear picture of who their buyer really is.
There are a few factors that usually drive this confusion:
- Lack of clarity about the value that they deliver and want to deliver to their market: I think in too many cases it is pretty easy to get lost in the idea that we offer up benefits like a great game, better user interface, great customer service. The list can go on for a while. But where we get tripped up is that we often lose sight of the fact that all of these things are great, but they are provided by lots of our competitors and that the big differentiation comes in the form of something unique that can’t be duplicated by another competitor. Here’s an example: if you are selling a game, its pretty clear you are selling a once in a lifetime experience because this game is never going to be played again. Another example: if you are selling professional services, you should focus less on the technology and more on the benefits and the people that are creating tremendous value. What I mean is if you have a killer expert, use that person.
- No clear indication of who the real buyer is: This is something I learned from Alan Weiss, but its the concept of the “economic buyer.” This is the person that can say yes, can authorize a check. In too many sales organizations, the sales teams aren’t clear about the person that they are trying to reach or are not willing to put themselves out there to the person that can say yes to their product and service…or at least to the ones that will make the biggest difference. This causes teams to spend a lot of time devising busy work that will drive activity, but not results.
This lack of clear strategic focus shoots far too many organizations in the foot.
Because without an understanding of your value and your customer, you can spend a tremendous amount of time and money focusing on the wrong things and the wrong people, never putting your team in a position to be successful.
When you combine the two, you have muddled messes of business models that don’t make a lot of sense. Or, you have businesses that deliver tremendous value to their market, but end up shooting themselves in the foot due to the fact that they are trying to be everything to everyone instead of being specific to one market or one buyer profile.
I’m not sure what will happen to Instacart, but I can be pretty sure that their current pricing model will have to change at some point.
The question is, will their business survive when it does?