Sent by Jonathan Stark on June 21st, 2017
Reader Tim Miko wrote in with a question about value pricing IoT startups (shared with permission and unedited):
I have been reading your emails for awhile and want to thank you for all of your advice and knowledge. I read HBIN and Philip Morgan’s Positioning Manual recently. I am working on overhauling my consulting practice and am starting with specializing in a niche. My current background and interests are leading me to position myself to focus on venture-backed, hardware IoT startups. There are only 150-250 venture deals done per year for hardware IoT startups.
I have a ton of experience to be able to serve my clients well with both productized services and custom engagements. I want to make sure I will be in a good position to use value pricing. Most early stage startups don’t have revenue, so the only metrics or business goals that would be driving the need for my work is to increase their valuation or to raise more money. Is that enough to employ value pricing?
Thanks again for all that you do!
Thanks for the question, Tim!
So... there are a number of things to comment on here before I answer Tim’s specific question. I’ll work through them one by one.
0. My Assumptions—For the sake of discussion, I’m going to assume that Tim is good at what he does, that what he does is of a technical nature, and that it is potentially beneficial to his target market.
1. Vertical Specialization—Tim is niching down on venture-backed hardware IoT startups. This is what I’d call a vertical specialization (well, not exactly but more on that in a sec). One of the benefits of a vertical specialization is that it makes marketing much easier than not specializing at all (i.e., a market of “everyone”) or choosing a horizontal specialization (e.g., .NET code refactoring, MySQL performance optimization, image processing automation, etc). As you can imagine from Tim’s message, he could probably make a list of a few hundred potential clients in about 60 minutes by browsing around something like Crunchbase or AngelList. Having a list like this gives you the power to be extremely targeted, persuasive, and proactive with your marketing efforts.
2. Venture-Backed Startups—If Tim was to do a pure vertical specialization, he would target “hardware IoT” companies. The “venture-backed startup” portion of his niche definition is not a vertical specialization; It’s a subset of his actual target market. The fact that a company is venture backed says more about their stage of maturity as a business than what they actually do. I would venture a guess (pun intended!) that whatever skills Tim brings to bear for IoT startups might also be of value to IoT teams inside of established companies like Phillps, Cisco, or Qualcomm. In my experience, it’s pretty hard to follow my value pricing playbook with immature business (startups or otherwise) because they don’t have enough experience to quantify tangible or intangible business outcomes.
3. Selling Shoes to the Cobbler—Value pricing works best when there’s a possibility of selling strategic engagements because the cost to you is low and the value to the client is high. This can result in lots of profit for both parties. If you are a technical person selling technical services to a technical company, then you’re going to have a hard time selling strategic offerings because they have expertise in the same area and therefore don’t need you to help them with or validate their plans. Assuming Tim offers some sort of technical services - scaling backed services, real-time API design, database optimization vs non-technical things like copywriting, fundraising, or developer relations - he’s going to have to work to avoid being seen as merely an extra pair of hands (e.g., staff aug).
4. Productized Services—My definition of productized services is this: a relatively fixed-scope service that you offer at a published price. By that definition, value pricing doesn’t exactly apply. Sure, you can set the fixed price based on a guesstimate of what it would be worth to your ideal client. But when I talk about value pricing, it’s on a client-by-client basis and is predicated on having a Why Conversation prior to setting your price. Productized services are a great way to break the chains of trading time for money and they can be very profitable - I just would wanted to point out that when I talk about value pricing, it’s in the context of custom engagements.
5. Value Pricing Intangibles—Tim’s ultimate question is essentially this: can you value price a service that produces an intangible benefit? The answer is yes, but it requires more savvy than value pricing something that has a tangible benefit like increased sales, decreased labor costs, or slashed AWS bills. Barring extreme circumstances, buyers make a value judgement on every single purchase - e.g., “Is this fidget spinner worth $6?” If so, the sale is made. If not, it isn’t. But what’s the ROI on a fidget spinner? The benefits are intangible. They differ from person to person, from situation to situation. But they are there and they are real. Your job when pricing a custom engagement that delivers intangible benefits is to determine the value of the outcome to the buyer in their current situation. That is what a Why Conversation is designed to do. (NOTE: Search my previous messages for “Why Conversation” to refresh your memory)
Sorry for the long email! I’ll try to be brief tomorrow :)
P.S. My private mentoring program is filling up. If you’ve been working for yourself for a decade or more and feel like you’re on a hamster wheel, check it out before the public launch -> https://jonathanstark.com/mentoring