Entering a New Market
Did you know that April is Financial Literacy Month?
While understanding your financials is important, knowing how to improve them is vital. That's where pricing strategy comes in. A few small changes to your pricing can result in some very big improvements to your profitability.
Pricing Question from a Reader
My partner and I have a lot of experience in the automotive industry. A few years ago we started a monthly service that helps scan and organize documents for vehicle service departments. It's going well, but we want to build a bigger business. I thought that the next market we should enter is finance. Buyers in this market have deep pockets and work with a lot of documents. What should we do to maximize our ability to charge high rates in this new market?
Congratulations on your success so far. Being able to create a business from scratch, especially in a field as competitive as yours, is very impressive. The good news is that there are so many strategies that you can implement to maximize your pricing power that I could probably write a book about them. Nevertheless, I have to ask you one question:
Why do you want to enter a completely new field? As a general rule, businesses keep their costs low and their pricing power high by building upon their previous successes and exploiting their biggest "unfair advantages." Entering a new market is, in many ways, the exact opposite approach. You'd be throwing away all of the advantages that you've spent your blood, sweat, and tears to acquire.
Although you haven't told me much about your business, I suspect that your unfair advantages are fourfold:
- You have a solid reputation in your industry
- You understand your buyers' culture
- You have domain knowledge
- Your offering has been optimized for your existing market
If you proceed with your entrance into the world of finance, you won't just be throwing away your advantages, you'll be competing against others who have built the very unfair advantages in finance that you now enjoy in the automotive sector.
- When potential customers in finance ask you about your customer base, you won't be able to point to users who face the same challenges that they do. More importantly, people in finance won't be mentioning your brand to their friends and associates. As a new entrant, you'll practically be invisible. You know the expression "Nobody gets fired for choosing IBM?" Well, as the new upstart in the field, you're not going to look much like IBM to prospective buyers.
- Businesses in the financial world are likely structured and staffed differently than those which you have been dealing. Financial firms are likely used to different lead times, standards, and styles of pitching. The very characteristics that helped you succeed in your current field may prove wildly detrimental in a new one.
- The car dealerships that use your products likely have very different use cases than do firms in the financial industries. You'll likely be blindsided by issues that competitors with more experience in the sector know to expect. When I led projects for government contractors, I had to learn the ins and outs of concepts like colors of money and the Antideficiency Act. Finance is a sector that is rife with regulation. Are you ready to learn its requirements from the ground up?
- As I'm sure you're aware, the types of forms that are used by people in the financial field likely differ from those against which your offerings have been optimized. Do you know how long firms in the financial industry are required to keep documentation, or what is often required to be produced if a firm is served with an order for discovery? Are you ready to devote months seeking out and testing your offering with the styles and types of documents used by financial professionals?
I'm not suggesting that you can't enter into a new market and succeed - you certainly can. But it's often a lot more risky and expensive than you might think. Just look at Microsoft. They've been promoting the search engine Bing for years, having spent billions of dollars in the process. Nevertheless, the firm hasn't even reached a 5% share in the search engine market. What you're proposing seems like a lot of effort just for the opportunity to compete in a new market with strong barriers to entry. Why not take a different approach? Why not think about how you can continue to build your business empire on your strengths, rather than on unnecessary risk?
You're already selling your offerings to a number of dealerships. Wouldn't it be great if you could somehow sell more of what you've already built to them? Consider other departments that exist within the average car dealership. What about sales and leasing?
Addressing the needs of these departments would require far less risk or effort than a movement to a completely new marketplace. More importantly, such a focus would allow you to build upon the advantages that you've already built for yourself. For instance, your existing customers represent an incredibly good set of leads that you'd never be able to recreate in a new market. As a rule of thumb, potential buyers who already trust and pay you will be much more likely to consider your pitches than would a business unfamiliar with your offerings.
Expanding organically through small shifts isn't just a matter of improving your bottom line. There's also the strategic angle to consider.
- A firm that can offer a uniform experience, addressing the needs of multiple departments, will be viewed with interest by potential customers. Unified offerings simplify customers' vendor management, reduce their training complexity, and allow for higher degrees of cross-departmental support. These advantages translate into greater pricing power for you.
- As your offerings support more and more departments within your customers' businesses, you'll develop strong barriers to entry. A rival that can only address the needs of a single department will be hard-pressed to compete with an offering that meets the needs of several. This is especially true if you can provide additional value through the aggregation of your services. As with all things, the value of a combined offering should be greater than the value of its individual components.
- As you continue to address additional needs of your customers, you'll have the opportunity to generalize your offerings in a way that will allow you to better address new markets in the future. Because you'll be working with your existing customer base, you'll be able to accomplish this task in a relatively safe environment that allows for incremental changes without taking on the significant quantities of risk that a new marketplace would provide.
One of the most famous lines from the novel and film Jurassic Park comes from mathematician Dr. Ian Malcolm. "Your scientists were so preoccupied with whether or not they could, that they never stopped to think if they should."
Should you enter the world of finance right now? I'd be hesitant to advise it. There are likely other opportunities that are far more worthy of your time and attention.
Questions come from readers like you. If you'd like your questions answered, send them my way.
♫This Q&A and many others are now available on the Pricing After Dark podcast.
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Notable Pricing Quote
"It costs a lot of money to look this cheap." -- Dolly Parton
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