A unicorn in the world of start up is one that is a valued at over one billion dollars. Coined in 2013 by venture capitalist Aileen Lee, the mythical animal represents the statistical rarity of such successful ventures.
But do the equivalent statistical rarities exist in the pricing world?
A pricing unicorn could be described as an improbable pricing event. For example prices go up 50% and demand increases by 100%, or a commodity with a 300% price premium holds a 40% share against a home brand competitor with 50% share.
Here is that 300% price premium example below in more detail.
It’s plain flour. A commodity product, with 3 options for the consumer. Ok, so this example is FMCG. Of course the principles in this short write up won’t relate to your [non FMCG] industry because they are so very different…….uh yeah…………well sort of….. not really……
The 3 brands of flour are listed below:
- The private label: “Homebrand”
- The traditional: White Wings
- The new innovative entrant: Healthy Baker
They are right next to each other on the supermarket shelves. Just sitting there.
Cue a pricing discussion somewhere else in the world between marketing, sales, finance and the executive team.
“We are a commodity and we can’t move our prices”.
Have you heard this before?
I get to hear it weekly. Some of you may hear it daily.
If you were given the costs for each of these 3 products what prices would your company come up with? What would be the difference in profitability?
Costs to manufacture below:
- The red home brand plain flour costs $0.50 cents
- The blue White wings flour costs 0.60 cents
- The clear plastic container healthy baker costs $0.70
How did you go?
Give this exercise to your colleagues and team. See how they go.
Do you have products or services that are considered commodities?
Is a 300% price premium something you would consider?
Is that kind of thinking even possible? What if….?
But what do you think is happening here with our flour example?
Is this just a one off never to be repeated phenomenon?
What happens when we say we are commodity?
What if we are actually not a commodity? How would you know?
It is worth finding out which products in your portfolio are a commodity and which are not?
The first clue is to not start with the product.
But don’t we need to list out its features and benefits compare them to the competition, look at our costs and then set the price?
This approach is okay as a start. In fact it has worked as a pricing strategy to build corporate empires for the last 100 years. Those same empires are now under more margin pressure than at any other time in history. It might be time for a change in our approach to price setting.
Think about these questions when setting your prices:
What is the motivation to buy the product? Personal discretionary, policy / rule driven or Mandatory / Legal?
What is the application of the product? Low risk – High risk?
Which customers would fall into the 2×2 matrix for the above two questions?
By classifying products / services you can star to unlock new different perceptions of value and opportunities to improve / protect pricing levels.
Our flour example:
Clue 1: Flour is bought by a fairly unique segment of households
Clue 2: It is often bought infrequently
Clue 3: The purchaser is often not the final consumer of what the flour is used for
Clue 4: The price of the home brand signals something – what could it be? Abstract concept… if each of these brands of flour was a medical specialist surgeon, which one would you be buying if you needed their help ?
Yes, commodities have been branded and are therefore technically not commodities. But how often do you hear the phrase “we have been turned into a bit of a commodity”? I hear it all the time. I have even heard staff a a German car company with a 3 pointed star on the bonnet say they have become a commodity in their spare parts division.
A question for another article: Is anything really a commodity? Well it is if your staff say it is, brand or no brand.
Key take aways:
- You have more pricing power than you realise.
- There are ways to discover this pricing power by asking questions not of the product but of the buyer and consumer.
- Translate the answers from these groups into a set pricing hypotheses and test well in multiple ways to “triangulate” your findings.
- Think through the consumer motivations for purchase.
- Avoid cost plus as a price setting mechanism
If you have examples of premium pricing of “commodities” or have a pricing unicorn in captivity, feel free to comment.