When to Use Radically Reduced Pricing to Disrupt a Market

Today, we announced that SalesCrunch is radically reducing the price of our next-generation, online meeting platform by 60-70%.   Before I go into why, let me start by saying that we started SalesCrunch to “Apply Science to the Art of Selling.”  We never intended to get into the online meeting market. We did it for three primary reasons:

  1. Science is about Measurement. We could not think of a better way to literally get into the conversations that sales professionals are having with customers and measure what works so it can be repeated with a predictable outcome. In fact, it’s not about the meetings, themselves, but what happens in the meetings we most care about.  There is a wealth of knowledge shared in meetings that has never before been captured or analyzed, until now.
  2. The Future of Business is Virtual. Increasingly more interactions with customers are happening virtually as distributed workforces become commonplace and large purchases are increasingly made without the need for face-to-face meetings.
  3. Virtual Sales Meetings Suck. Online meeting technology is archaic, horribly broken and despised by the vast majority of users.   The incumbent 800-pound gorillas, WebEx and GoToMeeting, face classic innovator’s dilemma that make it nearly impossible for them to make radical changes with new technology without a backlash from their users.

Our Original Pricing “Strategy”

I took an economics class in business school focused on price elasticity and other complex methods and models for pricing a product appropriately.  All that went out the window when we priced SalesCrunch. We simply looked at what competitors were charging for outdated, broken technology and decided to charge a small premium. After all, we have a significantly better platform that eliminated the need for software downloads and measured everything that was going on in your meeting to provide valuable intelligence. Basically, we charged $59 because we could.  Not a very scientific or disruptive approach and not my finest hour.

The Disruptive Pricing Decision

We were humbled by how positively the market received our platform.  We clearly hit a nerve and were solving a big problem.   We were surprised when companies started telling us they wanted every employee to have their own personal online meeting room, not just their sales team. They wanted pricing that could scale to hundreds and thousands of users and $59 per person per month just wasn’t cutting it.  We started doing what most companies make customers do–haggle for volume discounts. It was ugly for both sides and added a ton of friction to the buying process, which is costly for everyone. This made us think about how the most innovative companies disrupt existing markets and create entirely new ones by removing this friction with significantly better products at significantly lower prices than the incumbents.  I instantly thought of a long list of examples:

  • Netflix vs. Blockbuster. Nexflix came out of nowhere and put Blockbuster into bankruptcy by letting you keep movies as long as you wanted without late fees while delivering movies right to your door, saving you time and gas money.
  • Salesforce.com vs. Oracle. Salesforce.com launched a simple, web-based CRM solution for $50 per user per month when the only other alternative was paying Oracle millions of dollars for complex software that took a small army many months to install and many more months to deploy.
  • Dropbox vs. Microsoft. Three-year-old Dropbox is taking Microsoft by storm as it offers an infinitely simpler file-sharing platform at a fraction of the cost of Microsoft Sharepoint.
  • Google vs. Microsoft. Gmail offers a far more elegant and inexpensive alternative to Outlook and Exchange Server and is winning over thousands of individuals and enterprises everyday as a result.

The Impacts of Radically Reduced Pricing

There are many incredible benefits when radically lower pricing is done at the right time and place:

  1. Disrupt the competitive landscape. When radical pricing results from more efficient technology platforms, incumbents cannot easily compete despite their economies of scale. Often, they have extensive infrastructure costs tied to a legacy platform that cannot be changed fast enough to meet the price of a more efficient technology platform.
  2. Steal market share. New technology at significantly lower price points often start off addressing a niche in the market incumbents don’t see as big or profitable enough to worry about.  As the niche grows and the new entrant starts getting its own economies of scale, the incumbents unable to change infrastructure often go “upstream” to customers who can afford to pay a premium. The problem is that the new entrant is also constantly going upstream. The incumbent increasingly loses market share along with the technology advantage they once enjoyed. In the last three years, Salesforce.com has taken a significant percent of the Fortune 500 away from Oracle.
  3. Non-linear growth. Selling complex, expensive products requires a great deal of customer education and handholding.  Customer education is expensive, as it requires large sales and marketing machines and adds significant time to the buying process.  An increase in revenue only comes directly and linearly as you add salespeople and increase your marketing budget. When a solution is radically simpler and cheap enough for any individual user to put on a credit card, it can grow exponentially faster than any sales and marketing organization can scale.
  4. Grow a market. Perhaps the best part of radically pricing that comes from new technology infrastructure is that it can exponentially expand the size of a market that was artificially stymied by high prices.  The first ten million Dropbox users probably never heard of file sharing, let alone Microsoft Sharepoint.  Not one of the five million small businesses in the US could afford Oracle, but they can all afford $50-$150 a month for Salesforce.com.

 

When Can You Disrupt a Market with Radically Reduced Prices?

Being the lowest cost provider doesn’t mean you are going to be disruptive. Here are a few questions we, at SalesCrunch, asked to put ourselves to the test:

  1. Do you have a significantly better product? You can buy Blackberry smart phones for $100 while iPhones cost $400. HP tablets cost $150 while iPads run a cool $600. Why hasn’t Blackberry or HP disrupted Apple? Because Apple products are radically better. Price on its own doesn’t disrupt a market.  You need the one-two combo of a significantly better product at a steeply lower price to truly disrupt a market.
  2. Do you have a sustainable cost advantage? You cannot beat a multi-billion dollar company in a price war by playing on its turf.  Eleven years after its founding, Salesforce.com continues to rapidly steal market share from Oracle because Salesforce CRM is easier to use and is delivered 100% over the Internet.  Meanwhile, Oracle still requires a complex software installation that costs millions of dollars and small armies to install, maintain and train.  The infrastructure costs of delivering this type of product are enormous and there is no way Oracle can come close to meeting Salesforce.com’s price to compete.
  3. Do the incumbents face innovator’s dilemma? The bigger the market leaders, the more likely they cannot react to new entrants and new technology.  The longer a company has been around and the more customers they have, the larger the investment in outdated, costly infrastructure and the less tolerance existing customers have to radical change. The once beloved Netflix got pummeled when it tried to make radical changes to stay ahead of how we consume media online, losing 800,000 customers and having its stock price slashed from $300 to $75 per share in a matter of days.   Polaroid went bankrupt because it couldn’t turn its massive ship from instant film to digital despite seeing the need years earlier.
  4. Can you grow the market with radically reduced prices? Are the incumbents in your market charging artificially high prices because of historically large legacy infrastructure costs that created barriers to entry that have been eliminated by new technology?  Is there a broader use of your platform that could be unleashed if the price were in reach of a single user with a credit card?
  5. Can you build network effects and/or a brand as a barrier to entry? When network effect is present, the value of a product or service increases as more people use it.  Online social networks are a great example; sites like Facebook, Twitter and Google+ become more useful as more users join.  As stated earlier, for SalesCrunch, it was never about the meeting platform; it’s about all the data and intelligence that can be gleaned from customer interactions that is valuable.  The more people have meetings, the more statistically relevant, actionable intelligence can be realized.

SalesCrunch measures everything that is going on in a meeting, including what percent of time people pay attention and what percent they are distracted, how long the best and worst meetings last, what percent of the time the best salespeople spend talking vs. listening to the customer and the average number of slides used in the best and worst meetings.  LinkedIn profiles are automatically integrated, complete with job titles that can tell you how often decision makers are present in your meetings or how much your internal meetings are costing you based on the number and frequency of meetings and the caliber of people in each meeting.  The platform tracks who opens your emailed presentations and proposals down to the minutes and seconds they spend reading every page.   The more often you use the platform, the more valuable all these analytics are to everyone else on the platform.  You can quickly determine what separates the top 10% of your salespeople from the bottom 10%.  Back out one level and SalesCrunch can benchmark your sales team against all other users in your industry on the platform and show you exactly where you can improve.  Think about how Netflix or Amazon get increasingly better at recommending movies and books you might be interested in as more and more people shop from them.

In conclusion, radically reducing prices alone does not a disruptive opportunity make.  There is a perfect storm of new technology infrastructure that spawns drastically better, cheaper products that can grow virally while large incumbents who once enjoyed near monopoly pricing cannot turn the ship fast enough to compete.  SalesCrunch is extremely lucky to be at the center of such a perfect storm.   As Michael Arrington wrote in TechCrunch in 2007 when Cisco bought WebEx for $3.2 Billion: “There’s a good chance it (WebEx) isn’t going to work properly. WebEx is exactly the kind of company that is being disrupted by new web startups, who are creating cheaper and better alternatives to older web applications[1].” It only took four years for the perfect storm to land on SalesCrunch’s front door. I hope someone knocks on your front door soon.

[1] http://techcrunch.com/2007/03/15/cisco-buys-webex-for-32-billion/