Pricing and Perception, Part III: Lessons from Living in a Lesser Place

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In an earlier article, I discussed how one moves markets and sells products that financially make sense from a business perspective: the total lifetime cost (upfront plus operating) of a new product is less than that of the existing product, but is more weighted towards upfront than operating. In the LED example, the cost of the LED bulb was 20 times the cost of the incandescent bulb, but the lifetime operating cost far more than made up for the more expensive purchase price.

One of the tactics we raised was changing customer perspectives. This involves a mixture of changing the product offering and changing the marketing, but requires really understanding the customer mindset.

One example of a company that correctly conceptualized the problem and solution space - but failed miserably on execution, including market size and penetration, but that's a story for another time - is Better Place, the now-failed Israeli electric car company. From early on, I claimed that Better Place (or in my mind, "Lesser Place") was nothing more or less than a finance company. I once had the opportunity to converse with one of their early backers, who was highly displeased with my categorization. After all, they are about climate, and pollution, and are a great technology innovator. Actually, they were none of the above, nor did they ever try to be. They began, raised money, managed the PR and failed as a finance firm. If they actually understood the non-finance market, along with better execution, they likely would have done much better.

The key insight of BP's management (not to be confused with British Petroleum) was that the cost of the electric car plus the cost of running it over three years was actually cheaper than the similar cost of a traditional gasoline-powered internal combustion engine (ICE) car. In other words, the average cost per mile/km driven for an electric car was lower. However, an electric car required a fairly large weighting towards upfront cost. The problem wasn't one of cash, it was one of cash flow.

Modern society (actually, the earliest documents for this type of business date back thousands of years) has a solution to cash flow timing problems: finance. Every mortgage is nothing more or less than a solution to a cash flow problem. You know you will have enough cash to afford that house over the next 30 years, just not enough now. So borrow the money from a finance institution, pay them back over 30 years, they make a profit off of it, everyone wins.

Better Place said, "we believe that if we can solve the cash flow problem, people will buy our cars. And since they need special charging stations anyways, let's charge them upfront similar to the cost of a regular car, charge them per mile driven, and provide the electricity to charge it up at no additional cost." In principle, this was a great idea. BP did nothing more or less than provide specialized financing for the purchase of a car.

And in that respect, they failed. Beyond the publicly known execution failures, BP did not understand that even as a finance company, they were still selling cars to everyday consumers, and needed to understand their needs. Customers were concerned with: the range of the car, the need to find a charging station, the inability to run the car around your neighbourhood right after you came home instead of plugging it in. In most consumers' minds, electric cars were simply not as good as ICE cars. Ask Chevy or Nissan.

There are only two ways to sell a product that is not as good as your competitor's product:

  1. Premium: Make it so much better in other ways that it becomes a premium product. See: Tesla.
  2. Discount: Sell it materially discounted below the price of similar products.

BP did neither. They sold cars at roughly the same price as existing cars, even with the ongoing financing, and never claimed to be selling a premium product (which they weren't).

Your company may be providing one or more core services, but  if you hope to sell successfully, you need to fully understand what the customer is really buying and why.