RL40: Pricing a Niche Product
RL40: Pricing a Niche Product
There are riches in niches
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In case you missed it, we wrapped up hosting The Military Veteran Startup Conference last week on Thursday and Friday.
It was an incredible opportunity to gather the entire ecosystem for two days of panels and networking.
The feedback has been immensely positive, though I still have a weird quirk that makes hearing this feedback uncomfortable (I wrote about this feeling of imposter syndrome here).
My neuroticism aside, it was great, and I feel incredibly fortunate to have wonderful teammates - Tim Hsia and Carina Cho - plus a suite of interns and students who helped out!
We had >450 attendees across the two days -
I’m still digesting everything I learned from the event, so rather than doing a recap this week, I’m going to touch on a topic I wrote about last week.
If you haven’t read last week’s article on distribution channels - start here.
This week, we’ll talk about how important pricing is and why you can price a niche product at a premium price point.
The Power of Pricing
All of business boils down to an equation so simple, even a Marine can understand it -
Profit = Price x Quantity - Costs
There are only 3 ways to increase profit:
Cut costs
Sell more units
Increase the price you charge
Of all the business decisions you make, pricing may be the most important, and most challenging to get right.
Price is not purely a financial decision - it’s a marketing decision!
Strangely, pricing a product is just as much a marketing choice as a financial choice.
The way we interact with prices changes our perception of the product!
Here are a few interesting notes about pricing -
Commoditized products like gasoline are undifferentiated - we don’t care about the brand. Firms compete based on price in a race to the bottom.
Sometimes we have no idea how valuable a product is - we actually look at the price as an indicator of quality! Think about a $10 bottle of wine vs a $1,000 bottle - which is ‘nicer’?
There are studies that show prices ending in ‘9’ are more attractive to consumers - this is why things cost $49.99 rather than $50. WTF is wrong with our brains?
How we display sale prices matters. Customers respond better to price decreases in dollar value format for products over $100, but in percentages for products <$100. E.g.
Sale: 25% off of a $50 product (NOT: $12.50 off)
Sale: $500 off of a $2,000 product (NOT: 25% off)
There are a lot of ways to think about pricing and a lot of fun facts about pricing, but today I will keep the focus narrow and explain a concept that I find fascinating - the pricing of niche products.
What is a niche product?
A niche product is one which serves only a select group of customers rather than something that is for the masses.
For example - most beers taste the same - Coors, Miller Light, Budweiser - all non-offensive beers that have similar taste profiles.
Before the internet, companies thought of their distribution channels through physical stores. These companies distributed beer that was in the center of a taste profile to capture the maximum amount of market share.
The miracle of the internet has changed this dynamic.
The internet reconfigured distribution channels making it possible to reach the exact consumer you want to.
If you were a beer company in the 80s, it wouldn’t make financial sense to target the handful of consumers who love bitter beer - how many cases would you send to a grocery store in small town, USA?
Perhaps such a strategy could work in a major metropolitan area like NYC - there is bound to be a critical mass of these types of consumers, but not outside of urban areas.
The internet has flattened the distribution channel, however.
Now, bitter beer drinkers unite online on sites like Reddit. Influencers grow niche audiences united by common cause.
It’s easier to find these niche customers because they congregate online.
What was once not a viable strategy due to the limitations of a distribution network becomes viable due to the internet.
OK but what about pricing a niche product?
Here’s the beautiful thing about niche products - the further you are from the center of the distribution above, the more value you get out of a product.
If you love bitter beers, you’ll pay the $3 / can that Coors charges, but god you’d kill for a glass of disgustingly bitter beer. Bitter beer inc. could charge $9 per can and you’d pay it because it’s exactly what you want.
Don’t believe me?
The Alchemist Heady Topper is $20 for a 4-pack
Coors light is $9.50 for a 6-pack
The further we go from the center of taste profiles, the more we can charge.
Of course, it may cost more to produce, but that’s a topic for another day.
What are some facts about pricing that surprise you?
What are examples of goods you purchase that you look at the price to understand their quality?
What are examples of goods that you ONLY look at price to make a decision (commoditized)?
Let me know your thoughts on this week’s post by hitting reply to this email.
Best,
Brendan