Pricing lenses: what it is and what to do instead

The idea worth keeping

Not as boxes to fill, but as questions that fall out of the maths of the goal:

• What is the product worth to this customer, in money, per year?
• What is the cheapest alternative, and what does it fail to do?
• How does this customer approve a purchase (for example, a payback rule)?

Why reaching for it fails in an interview

• It is generic. Cost, competitors and value can be said about any product.
• It misses the driver that matters. For a new industrial sensor, the price is set by the cost of the failures it prevents, which is far above both cost and rival prices.
• It sounds rehearsed. Listing three lenses without doing the value maths sounds like a list.

What to do instead: a worked case

1. 1

   Pin the question

   Set a yearly price per machine that factories will approve quickly and that captures a fair share of the value.

2. 2

   Write the maths of the goal

   • Value to the customer per machine per year = failures avoided x cost of one failure
   • Customer payback = price / value per year
3. 3

   Use what you know about the business

   • An unplanned stop costs a factory lost output and repair, which is often far more than the sensor.
   • Plant managers often approve spending that pays back within a year without a long process.
   • Buyers trust savings they have seen, so a pilot on a few machines helps sell the price.

   The structure that falls out of it

   • Value to the customer
     • Failures per machine per year
     • Cost of one failure
     • Share the sensor prevents
   • Floor
     • Our cost to make and support one sensor per year
   • How they buy
     • Payback rule
     • Cheapest alternative

   Hypothesis: The value to the customer is far above our cost and the basic rival, so we can price well above both and still pay back fast.

4. 4

   Find the facts that decide it

   • A machine fails twice a year; each failure costs 40,000. The sensor prevents half, so it saves 40,000 a year per machine.
   • Our cost is 3,000 a year per machine; a basic sensor that only monitors sells for 2,000. At 12,000 a year, the customer pays back in 12,000 / 40,000 = 0.3 of a year, about 4 months, and keeps 28,000 of the saving.
5. 5

   Say so what

   Charge about 12,000 per machine per year: the customer saves 40,000, pays back in about 4 months and keeps 28,000, while we earn 9,000 over our cost. Start with paid pilots on a few machines to prove the savings. The risk is that failures cost less in some plants, so offer a lower price for less critical machines.

Build the acumen behind it

The worked case used two things a list cannot give you: the five moves, and knowing how this kind of business makes money. These pages teach both.