Pricing a new product in a new market
The “umph” method of pricing
Hello Global Builders —
Welcome to the Next Billion Advisors newsletter, focused on highlighting the lessons from a collection of entrepreneurs and operators with experience bringing technologies across emerging and frontier markets.
This piece was written one of our Founders: Mark Heynen, reflecting on his experience founding and managing Electrobug.
It was a hot summer afternoon in London in 2005, and I was in an insolvency practitioners’ office on Bond Street sweating bullets.
It wasn’t just the storied British disdain for a/c – I had that morning realized that we may not be able to make payroll next month, and Company Law in England & Wales has very strict rules (revised since) around not taking your company past that point. If you cross that line, bad things happen.
I had been in London for seven years at that point. I had spent the past six of those founding and growing my first startup. We had a great run, closing blue chip clients in 18 countries for a new type of online pricing data service built on cutting edge search technology, and growing a team in India to support those clients to 250 people. But market research is not a high growth industry, and I as a first time founder had grown capacity too quickly, and had exhausted all creditor and investor options.
The practitioner took a look at the Excel sheet on my Compaq laptop and frowned. “Look, mate, I would love to take your money, but really, have you considered raising your prices?”
I thought he was taking the piss, as the Brits say. I pitched myself to clients as a pricing expert. That was my business. Tesco, Boots, Travelocity, Expedia and others paid my company good money for data and insights on pricing.
But apparently not enough good money. He was deadly serious.
I walked into the Costa Coffee downstairs, cracked open my laptop, connected to the wifi, and drafted an email to all my clients doubling our prices. I leaned towards transparency, sharing this was required to continue operations, and that I understood it would not work for some clients and they would need to end our contracts.
The response was incredible and immediate. 75% of my clients said no problem, they loved the service. And the rest walked. This was a great validation of compelling product market fit and delivering value to our customers.
In the next two months, the business became robustly cash positive, and we were able to invest in more services, adding more clients, and after a bit more restructuring sold the business a year later. I then started a much less sweat-inducing job at Google in 2006.
Credit: Chiporchuk
What’s the lesson? In a new market, with a new product, your headroom on pricing is completely unknown, and you can be your own worst enemy, limiting what’s possible. As the owner of a small consulting business mentioned to me one evening over a beer at the Institute of Directors in Mayfair, the simplest and best way to price in an uncertain environment is the “umph” method of pricing.
What is this? In short, if a client does not say “umph” (or “hell no” or some other culturally appropriate expletive) after you quote your price, chances are you are pricing too low. You can always come down in price, but rarely (my experience notwithstanding) can you go up.
So my advice to founders in a new market is have courage, know your worth, and don’t be afraid of the umph.
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