Top 3 Strategy Tips for Entrepreneurs
“The meaning of life is to find your gift. The purpose of life is to give it away”
A successful business exudes purpose. And purpose emerges at the intersection of doing something you are good at, something the market needs, and something the market will pay for. If you find your purpose as a business, it becomes the engine that will propel your enterprise to new heights of success. Especially in the times of the COVID-19 pandemic, we've seen how much more willing customers are to support businesses with a purpose. A clear sense of purpose helps weather unstable business climates.
#1 Find your purpose
Purpose implies a focus on something greater than quarterly sales or outdoing your competition. Even though VCs invest in profitable market opportunities, it's the founder's sense of purpose that catalyzes the ink on the check. Purpose translates into an obsession with doing the right thing, empowering the customer. It means you are making the world a better place thanks to the value you bring to the market.
Purpose begets value and value is the zsa zsa zsu of every business. Under the hood, value is simply an abstraction of the perceived importance and practical usefulness of a given service. Businesses sometimes derive value from thin air, but even inflated valuations signal an underlying market need. For example, Tesla cars are the pinnacle of design, but a Toyota Hybrid sedan can take you from point A to point B just as well. That goes to say that consumers don't buy Tesla cars because they are an excellent means of transportation or for the environmental factor; consumers buy Teslas because they want to feel distinguished and to signal association with a specific social group. Business value usually tethers to a primal psychological need.
#2 Choose your place on the pyramid of business needs
Speaking of psychological needs: you must have heard of Abraham Maslow and his pyramid of needs… and if you have not, then you're just about to. Maslow's pyramid of needs is a theory in psychology comprising a five-tier model of human needs. From the bottom of the hierarchy upwards, the needs as articulated by Maslow are physiological, safety, love and belonging, esteem, and self-actualization. Businesses succeed when they can point their value proposition to a well-defined level on the pyramid of needs.
If you were to mirror Maslow's hierarchy of needs to reflect the reality of an AI business, this pyramid would look more like this:
As a founder, can you articulate where your business model sits on this mirrored pyramid of needs? If you cannot, then it's time to go back to the drawing board. Whether consumer or enterprise, customers buy solutions for an existential problem or critical pain point. Your business proposition should align with one or multiple of your customer's psychological needs. Suppose you can explain to your customer how your service helps address one of their fundamental needs. With such a well-tailored narrative, you're no longer selling but partnering with your customer on their journey to success.
#3 Price well, price early
So you've built a timely business that successfully addresses a market gap. Customers are flocking to your website, cloud servers go into an auto-scale mode, and your inbox floods with customer-support requests. Out of a sudden, you have to address the elephant in the room: how much does it cost?
Pricing is an emotional topic for both founders and customers. Customers want to enjoy the benefits of a service, but their spend budgets are tight or non-existent. Similarly, founders want to reap the benefits of the value they bring to the market - at a minimum, founders need to keep the lights on. However, businesses thrive on aligned incentives.
The cost of a service directly correlates with where on the pyramid of (business) needs it resides. When selling a commodity service (aka infrastructure), you have little bargaining power. But then you have the option to add on differentiated layers on top of the infrastructure and move up the pyramid of needs. The higher up on the pyramid of needs, the more leverage you have to charge for value. Nonetheless, there’s a benefit to operating at the bottom of the pyramid of needs: your total addressable market is enormous. Everyone needs infrastructure & privacy/security are table stakes for every customer. Your business might have low pricing power, but the high sales volumes will make up for the low margins.
Pricing for products positioned higher up the pyramid of needs is a craft. When you're pricing an innovative, differentiated product, you should start with a cost-based analysis. Because at minimum, you want to make sure you're covering your production costs. But remember you're in business and need to increase shareholder value aka turn a profit. A healthy business margin relies on pricing a % higher than the production costs. Another strategy you can explore when pricing innovative products is value-based pricing. With value-based pricing, you start to quantify the value you bring to the market in terms of operational efficiencies, new revenue streams, etc. Your pricing model can capture a % of the value unlocked by your product. If the value-based pricing analysis brings back numbers that are lower than the cost-based analysis, you're in trouble! Basically, your revenue will not cover the cost of production and your business will run at a deficit. Some companies can pull this off for a while with external funding, but you need to have a solid story for becoming profitable down the line.
Value-based pricing should be the beginning of your pricing journey. If your product is in high demand, there will be a pricing elasticity you can take advantage of to fine-tune the pricing model. It never hurts to experiment with different pricing schemes until you find that sweet spot between a price point that resonates with customers but also meets your investors' margin expectations.
Your pricing strategy should reflect the industry's life cycle. If you're dealing with a mature industry, it will be harder to drive sales with prestige pricing. Similarly, if you're in an emerging industry - commercializing innovative products - you have bargaining power and can adopt a pricing model reflective of the value your service brings to the table. I've already called out a couple of pricing models (cost-based, value-based), but here is a full picture of pricing strategy and pricing model alternatives for your reading pleasure.
I like to save the best advice for last, but you should implement this last advice first: price early!! You want to price early because you might discover you're chasing after a low-profit business (value-based pricing < cost-based pricing). Secondly, a healthy price point will help you chart compelling revenue projections that investors will love. If you do not know the price of what you're selling, you're practicing voodoo on your potential investors and future employees.
Success in business is a side-effect of a purposeful life. For those audacious builders embarking on the entrepreneurship journey, here are my top 3 strategy tips: find your purpose - or raison d'être as the French put it, align with the market (psychological) needs, price early. And have fun!
