Pareto on pricing

Vilfredo Federico Damaso PARETO (1848 - 1923) was probably one of the last humanists. With a life bridging the XIXth and the XXth century, he contributed to a vast array of fields ranging from engineering to philosophy, sociology, and, of course, economics. If he's well-known for discussing power law distributions and indirectly formulating the 20/80 rule, he also had a crystal clear view of microeconomics.

What he wrote on pricing still guides most of my thought processes when working on innovation strategies. It's deceptively simple:

The value of a product only comes from the trade made of it; there is no intrinsic value for objects.

When entering the market with an innovation, many startups try to act rationally and formulate a price point coming from comparable products or, even worse, by calculating a future cost of goods sold and adding a 'reasonable' margin. The only really reasonable price of an innovation stems from the problem it solves and the value it adds for the customers. To do this, unlinking the notion of price from what your product is, is key.

The central engine of the innovation framework is your Added Value. It explains how much of the problem you solve and the resulting unique customer benefits. These benefits can be tangible (« We generate an average monthly income of X for our customers ») or intangible (« We help you find love within a week »)

Consecutively, if you're a startup and don't end up commanding a premium price on the market, you're probably doing something really wrong – unless you're disrupting the market strictly following Clayton Christensen's definition.