The Tale of Two Companies and Their Pricing Strategies
A few years ago, two companies came up with a very similar concept to solve an issue in data centers - how to scale the data centers' data storage as companies' needs constantly increase.
Company A was engineering-driven and had superior technology. It was full of brilliant people who "knew what the market wanted" and therefore focused its product development on marketing on high performance, scalability, and security.
Company B was driven by marketing, taking enormous care to understand what their customers really wanted, and cared less about technically superior solutions. So, the developed product would make life easy for the IT manager - making it tremendously easy to scale the system. The term the Company used when marketing to IT managers was that they "could go home early." Something on the minds of most overworked IT managers.
Both Company A and Company B went to market at the same time. Both had dipped their toe in the water for about a year, attended some trade shows, and got a few sales and a few write-ups in trade magazines. Then Company A hired a consultant as acting CMO, and he orchestrated a proper product and company launch in three short months. Suddenly the Company was everywhere. In trade magazines, in analysts' reports, and even on television. The marketing spend on the launch was around $250k. Happy with the launch's success, the CMO went to the CEO to get approval for his marketing plan and the minimum budget needed to keep the momentum going for another year. He asked for $860k. The CEO said, "I'll give you 20% of what you are asking for or about $160k. Go do it!" The CMO tried for a few months but soon gave up and moved on. He said: "I was given an impossible task to do without the right tools and resources."
A year later, Company B filed for a public offering, and it was possible to review its marketing budget. Their marketing spend in the prior year had been around $850k. A virtually identical number to what the CMO of Company A had suggested, and the CEO shot that down.
The result was that Company A faded into obscurity despite the successful launch. With no meaningful budget to continue the momentum, the market quickly forgot about Company A. At the same time, the continuous presence of Company B kept the Company in the limelight and had customers flocking to their offering.
Company A got about $60m in venture funding and tried hard to make their technically superior solution work as advertised. The product was very complex but also, in a way, elegant. It was built by engineers who "knew" what customers wanted and "knew" what would make them buy. Company B had around $90m in venture funding. The product did not promise much in terms of performance but was simple and easy to understand. It was designed from an in-depth understanding of the customer, what customers really wanted, and what they wanted to hear to convince them to buy. "Go home early" was a compelling message to IT managers.
The Results:
For Company A, cash dried up before profitability was reached, so the assets were bought by Company C for pennies on the dollar. As a result, investors lost about $50m.
Company B's story had a better ending. The Company was sold to Company D for $2.25b. Happy investors. Happy Company.
I'm writing this because I was the new CMO of Company A - and when I understood how little the Company knew about its customers and how little the CEO understood and cared about marketing, I moved on. I knew there was just no way the Company would make it.
But what does all of this have to do with pricing? Well, the ludicrous way Company A priced its products and how it defined its market and product spurred me to incorporate the company now called Sjofors & Partners Inc and develop the process we use.
First, let's talk about price, and here is how Company A did it:
In the data storage industry (at the time, this might have changed), the cost of "cent per megabyte" of spinning hard disk drives was pretty well known.
Company A bought sub-systems, i.e., hard disk drives mounted in a box with some kind of control mechanism. Thus, the cost of these was well known.
Via "friendly" customers and resellers, Company A tried to obtain the price lists of competing and alternative products, including those of Company B. This did not work because the best that could be obtained was an incomplete last year's price list or an also incomplete, international price list. Then from the changes in prices of "cents per megabyte" and change in the price of the sub-system, Company A guessed the current price of competing and alternative products.
So now we have a price of competing product that is a guess. It may be an informed guess, but still a guess. This formed the baseline for Company A's prices.
From that competitor's price guess, Company A assumed that its product was better and gave more value to its customers. Essentially, data access was faster, and because of that, its prices could be higher than the competition. How much higher? A guess.
So now we have a base for pricing that is a guess, and to that, we add a fluff factor that is also a guess. Then salespeople were instructed to discount any price to close the deal!
Secondly, let's review the way the company "knew" what customers wanted:
Performance data among the product choices customers had was widely available. Not only on the various vendors' websites and in marketing and sales material but also from a handful of 3rd party product review consultants. Company A, of course, communicated with customers and prospects. Apart from a few high-level CEO-to-CEO conversations, most of these conversations were sales conversations. As the engineering-driven company it was, the salespeople were also engineers with little or no sales training. What they sold was "performance" because they could point to the products' performance figures and those of the competition and tell customers, "we are better." Other than the raw performance of the product, little was understood of the customer's needs and various use-cases.
So, let's summarize: Company A did not believe in "marketing" from the point of view of understanding in detail what is important to their customer; instead, they focused everything on "performance" as information about competitors' performance was widely available. The slight advantage Company A had in this respect was, in the end, not very important to its potential customers. The company did not understand the importance of continuous visibility and driving demand and, for that reason, did not see value in various marketing activities. Neither did they understand what would truly influence what customers were willing to pay for their products and instead resorted to guessing. This led to a pricing strategy divorced from its market's value perceptions.
So, as you now know, I was the acting CMO above. As a result of all of the above and my frustration with how Company A viewed marketing, I saw there must be a better way. And for that reason, I founded my own company so that we could offer companies a better way to know what drives their customers to buy. What needs their customers specifically want to be solved. What use-case, benefits, and perceptions influence buyers' willingness to pay for a product or service. How different buyer profiles lead to identifying the most desirable market segments. How to price a product or service so that sales friction is minimized and the resulting sales volume and revenue are maximized.
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