Doug Garnett wrote a blog post titled Pricing and Complexity (Part 3): The Tech Obsession with Cheap. This post is about the proliferation of VC-backed startups offering “a premium product or service at a discount price,” including Amazon, Uber, Lyft, MoviePass, Dollar Shave, WeWork, Casper, Blue Apron, Spotify, Netflix, and StitchFix. “Yet Not a Stich of Profit to be Found.”
« Ok. I exaggerated the profit statement. But it’s damn close. Netflix has a profit. Spotify has turned a profit a few quarters. Amazon is profitable but only through selling premium services at a premium price (AWS primarily but also devices and content). Uber and Lyft have stunningly massive losses. WeWork is falling apart as we speak. Dollar Shave was bought by threatening existing razor makers — not because they were profitable. »
« Yet none of the companies in my list are able to control costs to offer premium services at lower prices. »
« Disruption does NOT provide a premium product at a low price. When Christensen defined disruption in his book The Innovator’s Dilemma he explicitly noted that it happens as follows:
- The opportunity exists when “stodgy dinosaurs” have overloaded their offering with expensive premium features which aren’t valued by customers. (So the premium problem is on the end of those about to be disrupted.)
- Smart, nimble new entrants reduce features and offer a discounted product as a result. Done smartly, these new entrants take considerable business from the overburdened historical market players. »
« Each of the efforts noted above hit the market with exaggerated claims of how big and popular they’d be. This desperate need to scale has become core to the market of venture backed consumer efforts… Truth is that they tend to get very large numbers of customers quite fast. Unfortunately, none of those customers are profitable. »
« Another claim, is that once they are big enough, economies of scale will solve all their profit problems. Incredibly, this argument was still present in a recent Amazon annual filing — claiming that shipping costs will come down once…Amazon is big enough!!! At the time of the report, Amazon was spending over $26B annual on shipping. Tell me again, when do they become big enough? »
« Price is a field of subtle complexity. The key to smarter pricing is that age old discipline called “management.” Pricing management should be led by a marketer with strong support from CFO, product development, manufacturing, and the CEO. One of the first questions this team must ask is whether they are in that unique position where their technology will allow them to offer a premium product at a discount price. »
« This management team must also be skeptical of taking on massive ‘decision debt’ by promising investors that which can never be delivered — specifically promising strong profits by delivering a premium product at a discount price. »
« Done right, your price strategy becomes a strong support to building a strong company. Done poorly (as in many of the examples above), your management team ends up stumbling from light post to light post hoping to find a key which might lead to a stable business — all as you pay for the massive debt due on promises made to close your funding. »
Articles of Interest 