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Make it or break it! Pricing and the Business Model

Start-ups often wrestle with critical decisions on their pricing and business model;  since I’ve consulted on these subjects for hundreds of companies of all sizes, entrepreneurs often ask me for recommendations.

It is hard to give general advice since each company faces different challenges depending on at least the product offering, the competitive landscape and the types of customer. 

There are a few factors that are always relevant:

1. Value Based Pricing

Cost is obviously a consideration when setting prices, since no company can afford to sell below their cost for very long.

As long as you are selling above your cost, put thoughts of them aside and ask yourself how much your product is worth to your customers. Try to capture a fraction of the customer value in your pricing model.

Finding out the customer value is often difficult, depending on the situation. 

In many B2B settings, you can calculate the customer’s return on investment from adopting your offer. 

You’ll need to compare the benefits of your offer to your competitors’ offers and their pricing. If your offer improves something customers care about, you should be able to get a significant price premium.

Here is a Harvard Business Review article with a little more detail on value based pricing.


2. Customer Segmentation

 

Customer segmentation is widely talked about, but often misunderstood. 

Correctly applied, it is about identifying groups of customers with different needs, seeking different combinations of benefits and having different willingness-to-pay.  Identifying these customer groups and their needs is, of course, essential when packaging your offer into different bundles for those different customer groups.

Customer differences in needs seldom follow simple characteristics such as sex, age, type of industry or geographic location. To find your segments, you must do market research. Market research is quantitative stuff; you engineers ought to be comfortable with it. Since many companies don’t do market research, they go for a simple scheme, like selling different product bundles to different age groups. Those simple schemes do not capture real need differences between groups, and this approach therefore often fails.

 

3. The Business Model

Prices come in many shapes and forms. Most people think in terms of price level - “How much”. The way you price, the business model, is at least as important as the price level for commercial success.

There are many ways to sell and price products or services, including:

  1. Give it away and make money on advertising or some other indirect source of         revenue. Prominent examples are Facebook and Twitter.
  2. Free (or almost free) Product bundled with paid services.  

    Companies can charge for installation, maintenance, training, customization, and         consulting services. This model is often used by companies distributing Open Source Software, like Red Hat Linux.
  3. A Freemium Model. Software companies like LinkedIn and Dropbox offer a free,         limited-functionality version of their product, hoping that enough users will pay for a     premium version with more advanced features. 
  4. Razor and blade Model. Sell a necessary base component cheaply and make money     on consumables and maintenance or some other life-cycle dependent factor.
  5. Subscription Model. Instead of selling a product, offer it as a subscription including     maintenance, service etc. This model may be used in a wide range of situations. Rolls Royce famously decided to supply jet engines at a cost per running hour, including service and maintenance, rather than sell engines outright as they and all their competitors had done before.

There is no recipe for which business model is best for your company but selecting the most appropriate one will definitely have a major impact on your commercial success and the future value of your company.

Bluetail: Spinning out of Ericsson and selling for $150M in 18 months

Jane is one of the unsung heroines of the Erlang story. She was the first entrepreneur to recognise that having a better programming technology gave commercial advantages that could be turned into money.

Jane was the first entrepreneur to recognise the commercial value of Erlang and form a new company that would eventually earn over USD 100 million from Erlang.

Jane knew all sorts of things like how to start a company, how to raise venture capital, how to write a contract, how to sell software. Things that we knew nothing about.
— Joe Armstrong

In 1998, in those heady days before the great IT crash, we formed Bluetail. Bluetail had a strong technical core, composed of the techies who had made Erlang, and Jane. Jane knew all sorts of things like how to start a company, how to raise venture capital, how to write a contract, how to sell software. Things that we knew nothing about.

We knew how to do do techie things like how to write compilers, make databases, make fault-tolerant systems - but not how to turn these ideas into money.

In 2000 we sold Bluetail to Alteon Web Systems for USD 152 million. 

- Joe Armstrong in his blog post Making money from Erlang


Every startup has got to have a Jane!
— Joe Armstrong

...with five of the founding Bluetail team: Jane Walerud, Mike Williams, Joe Armstrong, Robert Virding, Garrett Smith at the Erlang User Conference in September 2016. 

 

Erlang has been used in many successful companies including IBM, Cisco, Visa, Klarna, Facebook, BT Mobile, Whatsapp and Ericsson. 


Joe Armstrong is best known as the creator of the programming language Erlang and the Open Telecom Platform (OTP). He was also a Bluetail cofounder. Read more by Joe: Making money from Erlang and How I got my grey hairs


Extract from The Erlang Factory: 

Jane was a computer science groupie at Stanford. After moving to Sweden (his name is Bengt), she made her living in IT sales and product management, and had a couple of small companies on the side. 

In 1997, Jane started work as Sales Manager of Erlang Systems. It was the perfect job - all those computer science people! - for all of two months, when Ericsson forbade the use of Erlang in new projects. Not enough people used Erlang to keep it dynamic, and Ericsson management was afraid of being trapped in a dying language.


It was impossible to sell Erlang when Ericsson itself refused to use it, and Jane persuaded Ericsson management to release Erlang open source in order to spread its use without sales. That strategy does seem to have worked...
A group from the CS-lab then started Bluetail with Jane as CEO, and sold it 18 months later for 150MUSD. She was Klarna's seed investor and talked the Klarna founders into developing in Erlang.

Lensway: What an amazing ride!

Photo of Daniel, courtesy of Footway

Photo of Daniel, courtesy of Footway


"When I came to Lensway in 2002, they were 4 people with very low salaries in a basement office. Two years later, revenues were 100MSEK, they turned a very healthy profit, and they were 55 employees. What an amazing ride - Thanks Daniel Mühlbach! 

We sold Lensway to Coastal Contacts of Canada. The company is now a very good second in the world market for contact lenses over the net."

- Jane Walerud

Crayfish party "Kräftskiva" with all of Lensway   at Jane's home. Jane is holding Daniel's oldest son.   August 2003.

Crayfish party "Kräftskiva" with all of Lensway at Jane's home. Jane is holding Daniel's oldest son. August 2003.

The Guardian: The perfectly fitting shoe is just a click away

A Swedish firm believes that it can take away the frustration of bringing home shoes that don’t fit by using spatial awareness cameras to provide a 3D scan of exactly what each person’s foot looks like.

Volumental, based in Stockholm, has developed software to take a lifelike image of the foot, which can then be used to make either shoes to fit exactly or find ones which are more suitablefrom the shelves.

“Our vision is that the system of going around the stores, trying on lots of shoes or jeans and different products and having a problem of not knowing whether you are medium or large ... I think that system will be completely gone in 10 years. Instead it will be size me,” co-founder Caroline Walerud says.

The Innovators on The Guardian

Caroline speaks at Startup Day

“SUCCESS IS NOT A STRAIGHT LINE” 
Caroline Walerud from Volumental reminds us that the road to success is a more complex road than what it seems. That sometimes, even the greatest idea is not necessary a straight line to an exit, a big bank account and endless holidays on the Bahamas, but that motivation, work, and a touch of taste for adventure is the key. Those inspirational moments were an important part of this one day event and by looking to the crowd, listening almost religiously the words from the speakers, you felt that this spirit will be found in the next generation of entrepreneurs.

Article in Arctic Startup

Volumental announces $3M investment

About FOUNDER.org:

FOUNDER.org is an investor and company building program for student entrepreneurs at leading universities around the world. Its intense 8D© Company Building Program fast tracks teams through the challenges of building a high impact company. The hands-on transformative experience is designed to increase the odds of survival and to help young entrepreneurs grow their companies faster and take them further, creating truly impactful ventures. FOUNDER.org provides the funding teams need to get started, investing directly in student startups from partner schools in seven different countries. FOUNDER.org was founded by a team of serial Silicon Valley entrepreneurs who have built billion dollar companies and are now working with the next generation of creative, audacious student founders to positively transform the world around us. Learn more at www.founder.org.

About MOOR:

MOOR is the venture investment firm of serial entrepreneur Kaj Hed, who founded Trema and is the majority owner of Rovio Entertainment, creators of the Angry Birds mega brand. MOOR is based in Stockholm, Sweden and is focused on companies within the digital space, poised for global opportunity. MOOR is an active investor that uses its broad network and experience to add value as it supports its portfolio teams. Visit www.moorcap.com for more information or contact Mikael Moreira at mikael@moorcap.com