If you’re not the Goliath in your market, be clear on one score: playing by the rules of the industry means playing by the rules that made the leader successful. If you’re David, you lack Goliath’s advantages —e.g., scale, brand, distribution. You won’t win by playing by the leader’s rules.
Winning against the Goliath in your market demands more than courage — it demands a redefinition of value itself. If your new pricing model makes the market leader uncomfortable, you’re on the right track.
To win, make your own rules. Play in a way where the market leader can’t follow you. This applies to how you price. Don’t just price like the market leader. Don’t just anchor your price on the leader’s. Look for a way to innovate the mechanism of value exchange, in a way that is very hard for Goliath to replicate.
Answer one question: How can you price in a way that conveys value to your customers, but the market leader will not follow you because doing so messes with their business model?
Goliath’s Achilles Heel
In most industries, Goliath’s pricing leverages their scale or their premium market position. It aims to deliver predictable margins to offset their cost base, and deliver shareholder returns.
If you innovate the pricing model, Goliath faces a strategic bind: they can ignore you and hope you fail, or they can follow you and risk their margins. A different way of pricing is a lot harder to fight than a cheaper price.
Examples of Pricing for Disruption
The ultimate way to mess with a leader’s business model is to change the definition of value. The four case studies highlighted here are in different industries, and share one common trait. The challenger innovated by moving from a pricing model that charges for the means to one that charges for usage or outcomes.
1. Aircraft Engines
Airlines don’t value owning engines. They value flying planes. In GE’s battle with Rolls Royce to dominate the aircraft engines industry, GE pivoted from selling engines to selling miles in the air. They pivoted from selling the means to selling the desired outcome.
2. Software
Software users don’t value owning software. They value using software. Software as a Service vendors disrupted traditional software vendors by pricing the usage of their software, rather than an annual license of the software.
3. Hardware
Companies who run software and websites don’t value owning hardware to power their applications. They value using the computing power. Cloud computing vendors disrupted hardware vendors by offering pay-as-you-go models for computing power, storage, etc., where companies only pay for what they use.
4. Professional Services
Companies who hire advisers don’t value their advice. They value the outcome of the advice. Professional service firms who charge based on the outcomes they deliver for their clients disrupt those who charge based on time and materials.
How to Disrupt with Pricing: The Challenger’s Methodology
Disrupting an industry’s established pricing model is a four-step process grounded in analysis and risk management.
1. Understand How Customers Define Value
Pricing disruption starts with understanding value and risk from customers’ perspective. Do primary market research, and identify the attributes of value that your customers care about. You must also understand what your customers are willing to trade off using research tools such as conjoint and MaxDiff.
Different customers define value differently. Create a behavioral segmentation. Some clients value price certainty because it’s easier to budget. They won’t like a model where the pricing model is variable. Others value an alignment of incentives between their supplier and themselves. They will value outcomes-based pricing.
2. Re-bundle the Attributes of Value
Once you understand how customers define value, the various attributes they value, and which they value most, you can bundle attributes of value differently from market leaders.
- Alternate Value Units: Adopt a unit of value that competitors cannot or will not follow. The four examples above are all examples of this.
- Attack Complexity: Consider radical simplification as the disruptor. Starlink built an advantage by offering pricing simplicity in a satellite telecommunications industry operating on intense price discrimination.
3. Mitigate the Downsides of the New Pricing Model
Pricing using new attributes of value creates business model risk. For example, pricing based on usage creates revenue uncertainty: it’s hard to forecast revenue and to manage a cost structure, both for the vendor and the buyer. Ditto for pricing based on outcomes.
Terms and conditions are an essential way to mitigate risk. For instance, an outcomes-based pricing model will require the client to accept certain terms. If the client chooses to add constraints or conditions, the vendor could request a retainer to manage risk.
4. Test the new pricing model
- Road test the new pricing with prospects, to gauge their willingness to adopt your pricing model and associated packaging.
- Do the same with existing clients, to gauge your ability to grandfather the new pricing into your customer base. If you use multiple channels to go to market, namely channel partners, test the new pricing model’s traction across the various channels.
Winning against the Goliath in your market demands more than courage — it demands a redefinition of value itself. If your new pricing model makes the market leader uncomfortable, you’re on the right track.
The challengers who win are not those who play harder within the existing rules, but those who dare to change the game entirely. Step back, rethink your value exchange, and ask yourself: what version of pricing would force Goliath to hesitate?
Mores articles on Revenue
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