First, position the product or service, then set the price

Clearly define what you are offering your target customer, and demonstrate how your offer differs from the competition

Lewis Cheng left for the United States with dreams of becoming an interior designer. Three years into his four-year bachelor’s programme at New York City’s prestigious Cornell University, he changed his mind.

He decided he wanted to be an entrepreneur.

On graduation, Mr. Cheng was recruited by the New York City office of JP Morgan. Before long he met Bella Kong, another Hong Kong native who had recently graduated from the Massachusetts Institute of Technology with a degree in management sciences.
When the two discovered they had a mutual interest in education, they decided to collaborate on an online service that provided tutorial support for students in mathematics.

“ By my junior year at university, I realized I didn’t want a career in interior design,” Mr Cheng said.

“ I knew I would eventually want to get an MBA for the financial knowledge I would need if I wanted to run my own business some day. I wanted to become a serial entrepreneur and someone who mentored aspiring entrepreneurs.”

The two spent three to four years developing their product. The result was an adaptive online tutorial designed to give primary and secondary school students a solid foundation in mathematics.

“ Most of the tutorial services on offer focused on plugging holes,” Mr. Cheng said. “We wanted to take a more holistic approach, building a strong base, rather than plugging holes,”

How to position and price the product was the next challenge.

“We realized this would be very difficult as we were essentially selling our product to three different kinds of people,” Mr. Cheng said. “The first were the children who would use it.The second were the parents who would pay for it. The third were the teachers who would have to endorse it. Without the teachers’ stamp of approval, saying the product had academic value, parents would not subscribe to it.”

Pricing was difficult for two reasons. Firstly, there were no similar products to make comparisons and, secondly, because the product would be offered online there would be expectations that it should be free. That was when Mr. Cheng decided it was time to go back to school.

In the end, about 100 potential clients in the United States and dozens more in Hong Kong were asked to try out the product and state what they liked and did not like about it, and how much they would be willing to pay for the service.

“They weren’t all that hard to find,” Mr. Cheng said. “Word of mouth spreads fast. The difficult part was finding people who would give honest advice. Many of them had had bad experiences with other tutorial services and were biased.”

According to Donald Barclay, professor of marketing, Ivey Business School, University of Western Ontario, the first thing an entrepreneur should do is “position the offer” by deciding whether it is a product or a service being offered.

“This , to me, is the most critical set of decisions the entrepreneur has to make,” Dr Barclay said.

“The outcome is a clearly defined position that resonates with the target customer and differentiates the offer in a sustainable manner against the competition.”

The positioning can be captured in a statement that defines the target market or customer segment the firm is after, declares what the product or service promises and explains why the promise was being made. These are known as proof points. An example would be a product targeted at a homemaker obsessed with laundry: the promise was the whitest of clothes and the reason was a special whitening ingredient.
The entrepreneur must keep in mind three cardinal points when positioning a product or service. The first is to identify the target market, the second to determine what those in this market value most, and the third to know what the competition is offering and what it is not delivering.

“The positioning of a product or service cannot be developed without this understanding,” Dr Barclay said.

Entrepreneurs should not think about price until they had developed a position.
“The pricing of the product or service is driven in the first instance by a clear understanding of the position,” Dr Barclay said.

“If the promise is like the laundry detergent promise, it turns out that the target customer is willing to pay more for a product that promises something they cannot get elsewhere.

“ In other words, they are willing to pay a premium for the reassurance that comes from the brand that offers the whitest clothes. It’s so important to this segment of customers that they are willing to pay a premium. So the positioning helps the pricing decision.”
“Entrepreneurs must also be aware of what is occasionally referred to as the Five Cs: customer, competition, channels, company objectives and costs.

“You must know what the customer is willing to pay for the promise, and you must know about the competition and its prices,” Dr Barclay said.

“You must know about channel needs- whether entrepreneurs are using distributors or retailers and what they expect in terms of margins. The margins must be high enough to get them excited about supporting the new product. They have to understand their company’s objectives- short versus long-term profitability.

“And they have to understand their costs, especially variable costs, to make sure the price at least covers variable costs and makes some contribution to overheads and profits. A clear knowledge of their customers and the competition feeds into both positioning and pricing.”

According to Roger More, associate professor of marketing at the same business school, pricing decisions become easier when you start by looking at how much your target market is paying for what he calls “the solution to their problem”.
But that is not enough. You must then look at what differentiates you from your competition.

“A lot of entrepreneurs focus only on what is so great about their own product or service and forget about what makes it better,” Professor More said.

“For example, is it cheaper, is it tastier or does it solve their problem more effectively?”
The only way to get honest answers to these questions is through focus groups.
“Bring potential customers together in a focus group and ask them what it would take to win them over as your customers,” Professor More said.

“It might mean inviting them out for lunch or dinner, but make it clear you want to know what they really think, not what they think you want to hear.”

Armed with this knowledge, you can start thinking about how much you can charge for your product- more, less or the same as your competition.

South China Morning Post
July 22,2006