Revenue streams are a function of transactions. In most cases, more transactions lead to more revenue. Today, we are going to move from exceptional utility to getting your price right.
Getting your price right is a process in blue ocean thinking. We have discussed the sequences around product design in blue ocean terms. We have covered the importance of developing the AS-IS Strategy canvas and distinguishing your offering from that of your competition’s.
Review these topics if desired here.
Most companies think that an analysis of competitor pricing is the determining factor in pricing their offering. They fall for the red ocean trap of simply lowering the price or adding perceived value and going to market. This is not proper thinking if you intend to capture mass markets of new customers and make it very difficult for your competitors to keep up with you.
The first requirement for strategic pricing is to determine what price will lead the masses to adopt your product or offering.
If you’re a service provider who never intends to scale your offering to a large market, this may not apply to you. However, I would encourage consideration of this kind of thinking. If you deliver a service that mass markets want but don’t have the systems or processes to scale the offer, you may find your audience will buy something from you that will scale.
For example, let’s say you’re a doctor that specializes in functional nutrition and your practice earns you a living based on trading time for money. In other words, you see patients all day.
If you’re a knowledge source and know your stuff, you’ve been recommending tools, supplements, protocols, and other products and processes that have been proven to help. With the right marketing strategy, your revenue from sharing your expertise could explode. You could write, start a community, sell proprietary products, or do group work that would allow your IP to earn you significantly more money.
Strategic pricing has its basic rules. You find quickly that pricing flexibility is affected by things like patent protection, excludability, and how consumers utilize your product or service.
The Blue Ocean Strategy method for exploring and setting this price is called the price corridor of the target mass. Remember, our goal is not the lowest price. It’s the irresistible price.
There are two key steps and a helpful graphic is shared below.
Step 1 is to identify the price corridor of the target mass. While you always have to know and understand what your perceived competition is doing as to price, the reality is that your customers aren’t thinking this way. They are thinking in terms of “what are my options?”
What takes a different form but delivers the same function? The example used in the text is the Ford Model T example. Had Ford attempted to compete with other carmakers instead of replacing the horse and buggy, his company never would have scaled.
What delivers up a different form and function but provides the same function? The example used in the text is a night out. How Cirque du Soleil delivered an alternative to dinner and a movie or a trip to the theater is a great example of something in a completely different form but it accomplishes the same core function. A night out.
Step 2: In the above image, you plot your circles based on perceived or real market size in the area governed by the heading above the square. Three general areas for image placement are offered: Same form, Different form, same function, Different form and function, same objective. Once that is done you’re then defining the tier of pricing. Is it upper-mid-lower pricing. These are determined by how easily competitors will find it to mimic or reproduce and take to market what you’re offering.
Remember, when you’re launching with the lower price point offering. You have to be able to deliver scale at mass to capture as much market as possible and retain it as long as possible.
When you’ve established your strategic price, you’re ready to move on to the next phase. Target costing.
The equation is as follows:
Strategic Price – Desired Profit Margin = Target Cost
You’re now on the move from exceptional utility to getting your price right.
In Ford’s case, he knew pricing had to be competitive with his chosen target mass. The user of the horse and buggy. What are your target masses? If you’ve followed the Blue Ocean Strategy process up to this point, you likely know. At this point, you know what they’ll pay or have an educated guess based on conversations and research.
Companies like yours have three primary levers in manipulating costs.
Lever one is streamlining operations and introducing cost innovations through the entire supply chain. In blue ocean terms, we’re not talking about sucking the life from your employees or using your suppliers. We talking about thoughtful analysis of high-cost low-value activities. Ask yourself the tough questions. If you don’t have enough information to make a decision, implement new measurements that highlight where changes may be made.
The second lever is partnering. Who wins when your customers win? Who wins when you win? One industry that has done this well of late is the accounting industry. After years of building clientele around audit and tax, great firms launched IT divisions. Where do you think they uncovered their first clients? Their current partner clients of course. You’ll find you can scale your offering far faster at times if you partner with those who will win by sharing your offering to their audience.
Thirdly, a significant lever used by many has been the wholesale change of the pricing model of the industry. This one is extremely exciting. Industries have been rocked by companies changing the pricing model of industries. This tool also serves to remind us that technology innovation is NOT enough. Value innovation, the core tenet of blue ocean strategy, is the simultaneous lowering of costs and increase of value to the customer. For example, Salesforce delivering cloud-based CRM tools at a fraction of the cost of server-based applications to enterprise clients. What might you be able to do to change the pricing model of your industry. So many industries are ripe for creative disruption via changes in their pricing models.
“A business model built in the sequence of exceptional utility, strategic pricing, and target costing produces value innovation.” W. Chan Kim/Renee Mauborgne
If you’re fortunate enough to have built your model this way, you’re still not guaranteed success. You will have hurdles. You’re employees, business partners, and the public will in some way attempt to block your innovations. All parties seem to have a vested interest in the status quo when it comes to innovation. The better your approach at times, the more serious will be the opposition. There are ways to bring all of these parties into the fold. Generally, the sooner you move to integrate them into the implementation, the better off you will be. I would highly recommend two reads. The first would be Blue Ocean Shift by the authors of Blue Ocean Strategy, W. Chan Kim and Renee Mauborgne. Methods for Blue Ocean implementations are shared in detail in the book. Secondly, I would recommend Leading Change by John P. Kotter. I leverage these reads as I do change management and implementations for all clients.
If you’d like to discuss blue ocean strategy implementations for your business or life, visit with Sherman Mohr, the blue ocean strategist. He offers a complimentary 30-minute chat for anyone interested in discussing strategy and their business.