Yesterday, I had an odd conversation with a founding team.
They were addressing an important, critical, and an absolutely need-to-solve problem with a lifestyle intervention solution. Lifestyle intervention is an area where I have had a high degree of investment interest. However, the founders' pricing strategy was a significant source of concern for me.
They wanted to address the mass market and, therefore, priced their solution at 1% of the failsafe solution if their program did not work. Due to the massively reduced price, they had to compromise on several things, viz Quality & experience of the coach
- Customer handled per coach
- Product packaging
- Customer retention
The venture seemed to be in a death spiral as the shallow price point reduced the customer's faith unless the results were instantaneous. Unfortunately for them, instant results were not possible.
- 1 out of 3 customers dropped off within 30 days,
- 3 out of 5 in 60 days and
- 4 out of 5 in 90 days (the eventual program is 90-180 days).
Eventually, their solution worked for 1 out of 6 customers that finished the program.
However, I believed (and conveyed) that the massive drop-off rate made the data extremely fuzzy.
I inquired if they would increase their price from 1% to 10% of the failsafe solution.
The higher price point would give them the budget to improve the coaching & product quality, address the massive drop-off rate, and (hopefully) the low success rate. They said they could increase the price, but it would mean that they would lose the mass of their targeted customer base. My team pointed out that they were (as it is) losing the mass of paying customers since they were only able to retain less than 20% at the 90-day mark.
I explained that India is a value-conscious market but not necessarily price-sensitive, especially regarding health matters. Besides, their meager ball price wasn't translating into customer referrals or huge profits. They weren't breaking even, and sales were stagnating, i.e., they were slowly but surely dying.
Lifestyle interventions require customers to have faith in the personalized plan, the coach's experience, and the product's quality. However, when bundled at a low price, far below what is reasonable, the customer inherently knows that they are compromising on something, if not all, their beliefs. In this case, the lack of an experienced coach that would provide personal care with strong follow-up on the customer during the intervention was sandbagging the results. Therefore, it wasn't a mystery that most customers lost faith halfway through.
The truth is that customers rarely blame themselves. Therefore, (to them) the failure of the program lies in the coach (who gets paid peanuts but "personally" manages 70-80 clients), the product (where differentiation and margins are wafer-thin), or in the program (which is well-intentioned but neither personalized nor adequately implemented).
Therefore, when deciding the pricing points, founders in this space must understand why their customers are coming to them and whether pricing or results will be the primary motivating factor in making their decision.
What their customers would tell them will surely surprise them. A customer signing up for a lifestyle intervention solution will pay more for the latter because (for them) the pain is deep enough to make a change. Therefore, the entire health & wellness vertical is a rare space where a lower price point hurts the quality perception and vice versa.
Besides, a low-ball entry-level price point will attract the wrong customer cohort. The kind will lose faith because they already know that the results promised at a price are too good to be true. When they get what they expected, i.e., slow results, they quit! It completes their self-fulfilling prophecy.
Let's not forget that if the lowest price would capture the mass, then Tata Nano would be India's number 1 selling car!