SVPMA Workshop: Strategic Pricing for Start-Ups, New Products, Innovations

1. Rich Mironov 27-March-04 SVPMA Workshop: Strategic Pricing for Start-Ups, New Products, Innovations

2. “Pricing is almost never about the number. It’s about the model.”

3. Agenda • Introductions • Where does pricing fit? • Philosophies, approaches, objectives • New and maturing markets • Exercise #1: Long distance calling • Exercise #2: Consulting engagement • Case Study: iPass • Exercise #3: New product, new market

4. Rich Mironov • VP Marketing, AirMagnet • Wi-Fi management software start-up, Sunnyvale • 42 employees, 1,800 customers, profitable • Valley veteran (since ‘81) • Big company product mgmt: HP, Tandem, Sybase • Start-ups: Wayfarer, iPass, Slam Dunk, AirMagnet • 15 years product management, mentor consulting • Monthly “Product Bytes” column

5. Where Does Pricing Fit? • Price is rarely the headline • Part of the business model • How do we make money? How much? • Revenue/profit/shipment forecasts • Supports core value proposition • “Our product/service saves you $$$$…” • …and we want 20% of the savings • Often an obstacle to buying • Too complex • Much too high (sticker shock) • Much too low (desperate, unprofitable) • Free (no reason to trade up)

6. Company Models • Big companies that do serious pricing analysis • General Mills, Goldman Sachs, United Airlines • Big companies that don’t • Nearly everyone else • Small companies built on a pricing strategy • SalesForce.com, NetFlix, Skype • Small companies without a clue

7. Philosophies and Approaches • We have the data, resources and commitment to do serious pricing analysis • Patient and scientific • The market defines pricing models and prices • Small fish, big pond • We have an explicit pricing strategy • But little data • Our costs and ROI requirements define prices • Cost-plus • We can’t ship until someone picks a price

8. Pricing Objectives • FIRST… • Don’t make price the primary issue • Don’t over-complicate the sale • Don’t require customers to be smart • Don’t change prices too often • THEN… • Support the business model/plan • Reinforce benefit of products/services • Pick natural units • Make correct ordering easier

9. New and Mature Markets Outside threats, late- comers Compete on price Mature markets Let 1000 Flowers Bloom, Darwinian New markets New pricing models Dominant pricingmodel

10. Exercise: Long Distance Phone Calls • How many pricing models for long distance? • ? • ? • ? • ? • ? • … • What advantage from each model? • Which customers make telco the most money? Least?

11. Selected Long Distance Models Based on… • Distance (miles) • Location (area code, country) • Per minute • Per month • Per month plus per minute • Per call plus per minute • Monthly minimum • Same provider (Friends & Family) And perhaps… • First minute free • Per byte? Per word?

12. Which Plan is “Best”?

13. Why So Many Plans? • New players enter market • Target specific usage patterns such as • Price-conscious heavy users • Immigrants with families overseas • Gouge unaware customers • AT&T keeps creeping up minimums • How to beat/cheat • Visit friends with per-month plan • Use standard LD plan to confirm call then per-call plan to talk at great length • Voice-over-IP • “Adverse Selection”

14. Customer Commitments “by the drink” “by the month” No commitmentHigh variable costs Lower volume Uncertain usage Optional Actively manage costs MUST KEEP MARKETING Big commitmentLow/no variable costs Higher volume Predictable usage Required (cost of business) Low cost control effort HARD INITIAL SELL

15. Commitments for Everyday Services • Things we commit to… • ? • ? • ? • Things we buy “by the drink”… • ? • ? • ? • Why?

16. Exercise: Consulting Services • Your last start-up just closed, so you are suddenly a consultant. A prospective client needs market analysis, MRD, pricing model. • What are your pricing objectives? • How to structure a project? • Risks for you? For client?

17. Possible Objectives • Work at any price • Food on the table • Loss leader • Underprice first assignment, get follow-on work • Good reference for other clients • Become indispensable • Push for a full-time position later • Gain market experience • What will the market bear? OK to lose assignment

18. Possible Models for Consulting Project • Per hour, no limits • Per project • Fixed price for initial sizing (“pay me to estimate”) • Per hour with project ceiling • Milestones (progress payments) • Equity (pre-IPO stock) • Customer sets value at end • Shared savings (portion of ROI) • Free (experience, reference, try&buy) • Barter

19. Risks in Consulting Models

20. Case study: iPass • Founded 1996: new market, new application • Falling asleep in Tokyo hotel • Early clearinghouse for Internet “roaming” • How do I get on the ‘net when far from home? • Built directly on Visa credit card model • Target: corporate travelers, “road warriors” • 170 countries • 20,000 dial-up numbers, 5000 hot spots… • IPO July ’03, $1B market cap

21. iPass Transaction Model ISP, PTT, hotspot Customer Site Internet iPass Global Transaction Centers iPass Settlement System

22. Evolution of iPass Pricing Model • Cost-plus pricing (mark up each POP 40%) • Buy-side prices are visible • Customers encouraged to use cheapest number • Flattened by country (then continent) • Simpler – outgrew unique price-per-POP • Some POPs more profitable than others • Customers indifferent to suppliers • Leverage moves to buyer (iPass) • “Home” seems expensive, “roam” is a bargain • Overlay Home/Roam model • What we learned from long distance market • Charge less at “home” but more to “roam” • Lots of “home” substitutes but few “roam” alternatives

23. Network Effect: Strategic Leverage • Maturing: dominant player connecting all major networks • All major dial-up networks (BT, FT, DT, CT…) • All major hotspots (T-Mobile…) • Who wants to join 2nd-largest ATM network? • Early: low volumes, high supplier prices, difficult purchasing • Grow user base, add more networks… • Mid-cycle: can substitute suppliers, improve quality, simplify end user experience • Companies want biggest network • Networks want most roaming users

24. Software Models: The Real Fun • One-time license per copy • Big corporate, desktop, home/SOHO • Support or maintenance • Bundled with hardware • Per transaction • Per byte, second, article, page, virus scan, auction • Volume discounts • Rental • Hosted or installed • Per copy, seat, hour, Mbyte, website, e-store • Prepaid usage…

25. Exercise: Teleportation • Founders: Stanford quantum physicists • Combination of software, custom hardware • Early version has important limitations • Inanimate objects only -- no live transport • Under 40 pounds, under 18” diameter • 2000 mile limit • High power requirement (15 kW) • 45 second recharge time • Destination +/- 6 inches • So far, only limited lab testing done • Lots of VC money available

26. Not yet a product or service • No target application or audience • No marketing or sales staff • No go-to-market strategy • No price analysis, no pricing model • Lots of (heavy) water cooler discussions

27. Assignment Group: brainstorm target application(s) Split into teams • Build a value proposition • Choose a pricing model/unit • Justify a price • Model’s risks to customer • Risk reducers? Pricing bells & whistles? • Present your solution

28. Presentation • Target audience • Pain (cost of current solution, limitations) • Unit of pricing/metric • Reason to use this solution • Specific price(s) you picked • Why

29. Pricing Take-Aways • First goal is to avoid impeding sales process • Occasionally, price as strategic advantage • Must support business model • Think hard about target audience, pain • Pricing model aligned with pain • KISS • Savings >> price • Units make sense • Risk reducers • Invest in research if you can • Competition, interviews, historical databases

30. Rich Mironov 27-March-04 SVPMA Workshop: Strategic Pricing for Start-Ups, New Products, Innovations

31. Time permitting: AirMagnet demo