Startup Junkies Episode 4 - The pricing argument
With Episode 4 airing on MOJO again this week I thought I'd address the pricing argument that occurs in that episode of the show. What was my beef?
The issue was around the number of people that would be needed to manage the Cheetah account and whether enough headcount and additional operational expenses were factored in before we gave Cheetah a pricing proposal. When I first got to the company, no account manager was in the headcount plan. Once Cheetah came on board, which has over 70 offices and 60,000+ employees, I was concerned we'd need not just 1 account manager but several - not to mention more customer service reps to deal with Cheetah employee calls, and possibly even a head or two in the technical team for corporate-level feature development. I wasn't comfortable because I couldn't lay my hands on a budget that included a detailed headcount plan around corporate customers. Ron was assuring me enough margin was in his initial pricing to cover these heads, but being a bit anal where data is concerned, I wanted to see what had been included for myself. (I discuss headcount plans further in this entry as well.)
Pricing is one of the most difficult parts of marketing. I'll never forget being told by the president of Nextel when it was a mere startup that I held the entire revenue potential of the company in the palm of my hand - whew! It's true - pricing sets the maximum revenue per customer so getting it right is critical, especially with a company that has a lot of operational parts and costs and for which there is no real competitive data. When I constructed the pricing for Nextel Communications when it was a startup, we had only 2 offices and 15 sales reps - but I had to plan for the overhead of numerous sales offices and retail stores. When pricing your services when no competitive data is available, you must think at least 3 years into the future in terms of where your operations costs are likely to be, because it's very easy to reduce your prices, but extremely tough to raise them without losing customers.
The issue was around the number of people that would be needed to manage the Cheetah account and whether enough headcount and additional operational expenses were factored in before we gave Cheetah a pricing proposal. When I first got to the company, no account manager was in the headcount plan. Once Cheetah came on board, which has over 70 offices and 60,000+ employees, I was concerned we'd need not just 1 account manager but several - not to mention more customer service reps to deal with Cheetah employee calls, and possibly even a head or two in the technical team for corporate-level feature development. I wasn't comfortable because I couldn't lay my hands on a budget that included a detailed headcount plan around corporate customers. Ron was assuring me enough margin was in his initial pricing to cover these heads, but being a bit anal where data is concerned, I wanted to see what had been included for myself. (I discuss headcount plans further in this entry as well.)
Pricing is one of the most difficult parts of marketing. I'll never forget being told by the president of Nextel when it was a mere startup that I held the entire revenue potential of the company in the palm of my hand - whew! It's true - pricing sets the maximum revenue per customer so getting it right is critical, especially with a company that has a lot of operational parts and costs and for which there is no real competitive data. When I constructed the pricing for Nextel Communications when it was a startup, we had only 2 offices and 15 sales reps - but I had to plan for the overhead of numerous sales offices and retail stores. When pricing your services when no competitive data is available, you must think at least 3 years into the future in terms of where your operations costs are likely to be, because it's very easy to reduce your prices, but extremely tough to raise them without losing customers.
I could tell most at the company thought you were right but didn't have the nerve to break it to Ron. At least you tried.
Hope they figured it out given their intended growth path - Raising prices on customers because of poor planning has severe consequences!
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I appreciate your faith in me but I want to make sure my message is clearer than perhaps it was - Neither of us were right or wrong, we were just trying to get to the bottom of it. What I enjoy about startups is that having open discussions - OK, even arguments - simply leads to better decisions and is generally encouraged. The company won't work out its kinks otherwise. Startups with yes-men simply don't get very far as one person can't possibly have all the answers.
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