When I start talking to people about their business idea, things often move quickly to pricing – as if that's the real puzzle that has to be solved. And while it's true that there's a lot of good work that will need to go into pricing your product or service right, I don't think it's the most important thing you have to do.
Pricing Is Secondary
Target markets and product definitions can't be ignored, so don't get me wrong. But those are the high level items you tackle to make sure there's even a chance for a product-market fit. After that, people regularly want to move to pricing. But I think people often confuse two related terms…
There is a difference between Pricing and Revenue
Pricing and Revenue aren't the same thing – though they're closely related. The price of an item or service is what you hope to charge, and what you hope clients will pay. There are tons of pricing strategies – all of them valuable in their own context. Revenue, on the other hand, is all about the amount of money that comes in (over a period of time) for a product, based on it's pricing.
Revenue is Primary
Why is Revenue key? Because whenever someone wants to talk about pricing, they're making implicit assumptions – how many units they'll sell (or hours of service, or jobs), how often people will return to purchase more, how often they'll be able to up-sell or cross-sell other products, etc. When you start talking about all that, you're not talking about pricing. You're talking about the revenue that comes from a business model.
Why Business Models Matter
All those assumptions about how the business will work, how the customers will interact, how often they'll buy, how much you expect them to purchase over a year, or over the lifetime of the relationship they have with you – all of that is your business model, and it's far more important than the price of your product. Need to figure out your business model? Look no further than this great book!
There's nothing as sweet as Recurring Revenue
All that said, there's one business model I like the most. The one that I go to in just about every case when I'm helping people think about their business, and it's a model of recurring revenue. You can call it membership pricing, monthly pricing, yearly pricing, or anything else – but I call it a sure bet. That's because at the beginning of the period (month, quarter, or year), you aren't starting from zero. You already have a base of revenue that you can count on. There's nothing sweeter!
Want to talk more about your Business Model?
Let's connect and talk more. I love chatting about business models.