Pricing Power
- Dan Greenberg
- Jan 21
- 8 min read
Many economic theorists and thinkers spend their life working on marketplace design and trying to understand the most efficient ways to design markets. What they focus on, for the most part, is maximizing the utility. The interesting thing about this is that only a buyer or a seller ever make a decision about a purchase because no single actor is both buyer and seller at the same time. In order to have a successful business, you must have a market of buyers, and in order to make a purchase, there must be a product created by a seller. The economic theorist is a figment of the imagination. In other words, no one actually cares about the efficiency of the market in the real world. In the real world, there are only buyers and sellers. Sure, a seller might want to sell something at a fair price because they have moral concerns or image related concerns, but that is still a seller responding to their own incentives. And sure, a buyer may want to tip more than is necessary or support a small business by paying a little extra, but this is a response to their own incentives, monetary, or otherwise. There is no actor in real life aiming towards an efficient market. This means that you, as the selling organization, and the market of buyers define the marketplace, and your pricing power is largely dependent on how well you frame your proprietary capabilities and value.
Buyers prefer perfectly open markets where everyone knows all the information available and where there is very little structure. Since there are always more buyers than sellers, this means that buyers can move from seller to seller at will and pit them against each other, driving prices down. Sellers, on the other hand, prefer auctions. These are perfectly structured settings where the seller can position themselves as a unique offering and allow bids and competition to obtain that offering to dictate the price.
Let’s think about the case of data sales. Data has to be sourced, tracked, aggregated, packaged, and executed. It can be sold at any of these stages, but the level to which it is commoditized vs. invaluable has a lot to do with what stage it is sold at. Let’s think about location data for a moment. Location data is simply data that indicates where a person is, or has been, based on GPS coordinates that are read by a user’s mobile device based on its communication with a satellite. An organization paid to create the technology and put that satellite in the air, and a company built the phone. Once they work together to originate that piece of data it is now a sourced piece of data. It is essentially worth nothing, but it exists. Now, a company comes along and scales an operation that can track this data across millions of devices, consistently over time. This data now has some value to it, but it is mostly commoditized, and limited in its usefulness. Now, a company comes along and decides to aggregate and organize the data. This means that they have aggregated groups of like data into forms that are ingestible for use so that companies can integrate it into their processes. The data is now useful, but still commoditized as access to GPS data is not uncommon, and the work required to aggregate and organize it is not proprietary. Now a company comes along and packages the data into usable groups and segments. There could potentially be some proprietary technology that goes into the packaging of the data, and the usefulness also improves significantly. However, there are no limitations on how many companies can do this so there is still some commoditization. Lastly, a company comes along and thinks about what other businesses will use this data for. They move from packaging to execution, and build platforms, and service models that integrate the packaged data into other workflows and execute on behalf of businesses. At this point, the product is likely very useful, and also potentially invaluable. By this, I don’t mean infinitely valuable, I mean hard to value precisely due to its uniqueness.
In the scenario above, a company that sells raw data that is simply sourced and tracked has very little pricing power. Of course, their costs may be very low, so the business may succeed, but since the barriers to entry are somewhat low, and there would be a number of other low cost competitors, the buyers will have a lot of control over how the market is structured and what the price is. However, a company that is executing for its customers has had to build their own proprietary software, systems, and integrations that allows them to do things like analyze the data and provide relevant insights, or measure locations in a way that tells businesses what their customers are doing or where they should build new stores, or target specific groups of customers with specific marketing messages. All of these executions make the offering more proprietary, and less commoditized. Of course, as technology makes it easier for competitors to build proprietary software, systems, and integrations like these, even the most unique offerings will start to slide down the scale towards commoditization. However, when the offering is unique and hard to value, the buyer has control over the structure of the market and the price to a much greater extent.
I just picked two relatively simple examples to explain the extremes. However, imagine a situation where you are a seller for DataMania, a fictional data company, which sells packaged data, and some executed insights. In this scenario, you may be perceived by some as a commodity because there is no proprietary effort that goes into packaging of data, but you also may be perceived as a unique offering by some who don’t have the ability to access insights in a cost effective way without your services. In this scenario, your aim is clear, you must accentuate the unique and premium nature of your insights, while at the same time accentuating the resource lift that would go into sourcing and packaging data that your customers can outsource to you.
I went through this somewhat drawn out example to illustrate how much is not set in stone when it comes to the structure of the sales process. Compared to the raw data seller, in this example, DataMania is a much more unique, and useful offering. However, compared to a company that sells executed end to end solutions, DataMania demands resources of the buying entity and is quite commoditized. The perception of the buyer is highly dependent on what other products and solutions they have used and been pitched before, and so much of their understanding of your offering will come down to whose frame is adopted as the starting point for the conversation.
If a client is concerned with the resource lift that they will have to exert in order to use your solutions, the way to frame the offering is against other solutions that are less useful and more commoditized because these solutions are not custom and usually take extensive dev work to implement. Sure, they will be cheaper initially, and you will be more expensive, but if the cost that your client has to endure in terms of resource commitment is a major concern to them then the comparison of the relatively small monetary cost that they will have to pay you can be framed to offset the major resource commitment cost of going with a cheaper competitor.
If, on the other hand, the client is concerned with duplication of resources you may have the opposite conversation. In this scenario, you come across a client who has already built internal systems designed to analyze data and spit out measurement reports and insights. If that client buys end-to-end fully executed solutions from your competitors, they will be paying for something that they already invested resources to build, and they will be potentially adding internal confusion by adding redundant systems. Positioning your relatively cost effective solution against the more expensive and redundant solution here makes sense.
The point is that client resource lift runs along a scale that is almost directly conversely related to price, and figuring out where your client wants to fall on those two scales relative to each other will help you frame the structure of the conversation and the positioning of your solution. All the while, the commoditization scale is overlaid on top of the conversation and the less commoditized your solution is perceived as being, the more you can charge for it and the more resource lift clients are willing to commit to have it.
You have the ability to frame your solution against any background and any other solutions that you choose to, and if you miss an opportunity to do this correctly, you can put yourself in a tough situation when it comes to aligning your offering with the clients priorities.
Introduce a third solution into the conversation. This can be when you are comparing your solution to another company’s solution, or when you are negotiating on service level or tier. If the third option is similar to the option you would like the buyer to choose, but a little worse, it will highlight the positives of the option you would like the buyer to choose and minimize the validity of the original second option.
Abstract comparisons don’t work. In order for your solution to be understood, it needs to live in reality and be compared to something that the buyer can understand. Sometimes that is a solution they are already using, sometimes that is another solution that they potentially could use, and sometimes it is simply the status quo, or the lack of a productized solution. Either way, it is not only your job to talk about that great place that you can get the client to, it is also your job to create the antagonist in the story, explain why it is incongruent with their priorities, and animate it. The way you frame that comparison is how you rig the game in your favor, and it is how you allow the buyer to visualize their choice.
When it makes sense to do, create a matrix for your buying organization. Include your competitors and be honest about what they do better than you. Compare the buyer’s priorities to the things that you do and include information about their desired outcomes and how they are fulfilled by each competitor. This is another way of creating comparisons, and animating the antagonist. Remember that status quo, ‘no solution’, and ‘multiple solutions’ are all competitors of yours if the client can viably choose any or all of them. Oftentimes sellers get very caught up in proving that they are better than their direct competitors, and they may even convince their client, but if the perception of value is not better than the status quo or no solution, convincing the client that they are the best just does not matter.
Your job is to create an auction-like environment for your solution. The idea is to frame the solution against more commoditized competitors in order to create desirability. Why do auctions work so well? People are buying the prestige, the honor, the lack of embarrassment of being beaten. They are buying the outcome, and using social proof and well timed scarcity signals can allow you to surface the very real actuality that the client has to compete for your time and your product against others that are more willing partners.
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