Price Right In The Blue Ocean
Are you on the verge of creating a whole new category in the post-pandemic (nearly there!) world, but are wondering how to price and position within it? You are then in the proverbial blue ocean, a term from Professors Chan Kim and Renée Mauborgne’s seminal work, Blue Ocean Strategy.
A blue ocean alludes to industries or segments that don’t currently exist; the unknown market space. The strategic approach itself suggests how to create new demand, where companies develop uncontested market space rather than fight over a shrinking profit pool.
At the core of the blue ocean strategy is value innovation and creation, coupled with differentiation.
This HBR article suggests that companies that create a new category typically capture 76% of the total category market capitalization. A new business category may need an all new business model too. Pricing is integral to a business model, and navigating your company through stranger tides also means there is a fresh opportunity to create a whole new cost structure.
Joshua Bloom, Managing Partner (North America) for consultancy firm Simon-Kucher & Partners, best known for their pricing expertise, shares his insights below on how to steer the right course, and price for success. The following excerpt was originally published in my book Price To Scale.
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If you’re really creating a new category, this is one place where I actually think that economic value analysis makes sense.
It’s a bit textbook, but it is about really understanding what value you are creating for your customers through their business outcomes, operational efficiencies, etc. and then remembering that even after you calculate all that, you still need to have a typical software return on investment (ROI) sharing those gains.
Even if you calculate the entire value capture and you’re able to document that, I still think you’ll only get like 10-25 percent of that in pricing. This is because you need to leave a 4x to 10x ROI benefit to the customer.
One thing that people miss, is that they do economic value analyses and say they’ve created all this value, so they need the corresponding price. Well, not really. You not only have to share gains with your customers, but also make it compelling for them to invest as well.
That’s a useful framework to think about. If nothing else, the work done in putting that together, becomes your marketing collateral in discussions when there’s no anchor and no differentiator.