Lesson 12: Key Purchase Criteria, Willingness to Pay, & Pricing Strategy

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Good morning. It is early as heck out here. I usually get up at like 3, 3.30, sometimes 4 a.m. these days, and I think that's maybe just a part of getting older, but yeah, visit the shop, get those night mode glasses.

I've already had a couple conference calls with Europe this morning, so we're off and ready to go, and you know, it's pretty dark out here, so we are, we're still a few hours until light comes up, depending on what part of the world you're in, but east coast of the U.S. these days, yeah, so shout out all my friends in Australia and Japan and Europe and all over the world. Today we're going to be talking about willingness to pay, key purchase criteria, and pricing. So first things first, let's start with key purchase criteria.

What does that even mean? Pretty technical conversation there. So key purchase criteria is essentially the list of things that the customer requires before they will buy your product or service. So these two things break down down into essentially two categories.

The first one is table stakes features, and the other one we could just call it differentiators. So what are table stakes features or elements of your product or service? Table stakes is essentially the things that you must do before I will even consider buying your product. So let's take a phone, let's take a phone for example, smartphone.

In the past, a phone just had to make a telephone call. After the iPhone was created though, it quickly created a new table stakes environment, which means you needed a touch screen with multi-touch, a large screen, you needed it to be portable, it needed to work over cellular networks, it needed to have a data connection so you could browse the internet, and then you needed to be able to have apps on the device, and each app performed a different general function. So one of those could be a media player.

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So you could watch YouTube, you could watch videos, you could listen to music, so essentially they combined the iPod with the iPhone and had maps on there so you could navigate around. That became table stakes pretty quickly. So then the next differentiated feature was, all right, let's really play up the screen size, the resolution of the screen, let's add more cameras to both the front and the back, let's add simultaneous video recording over the top of both front and back cameras at the same time, which finally came out at the end of 2025 with iOS 26.

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So those are how table stakes features or differentiated features quickly become table stakes features. So for more on that and how you continue to win regardless of what competitors do, see our other video on strategy, and we'll talk about that so you don't get in these ticky-tack feature wars. So that's key purchase criteria, and sometimes those can be functional requirements, which I just described, like the water is wet, the water is in a bottle.

Sometimes they can be non-functional requirements, which are things like, I really need to trust your brand in order for me to give you my data, and that you're not going to train some crazy AI model and use it for bad instead of good, or I want to make sure that your products weren't tested on animals, for example. So those would be non-functional criteria, and that's where we get into things like emotion and feeling and what you're delivering as part of the brand promise that's true to your core values, and that then comes back to competitive strategy, which is like, oh, then you really become a copycat if you start copying someone's core values that are inauthentic to you or your company. It just becomes completely obvious to everyone in the market.

So that's how you sort of stand out. So that's a quick talk there on key purchase criteria, and so the question that you have is, well, how do I figure out what those KPCs are? And that's the abbreviation, the key purchase criteria, because we get sick of talking about it with all of those syllables. So KPCs, how do you figure those out? Well, back to classic product management 101.

You got to go talk to customers. You got to go experience the market, interact with the market, listen to the market. Less talking, more listening, and they will tell you.

They'll say, yeah, like, you know, we've got a feature list for the enterprise, and it's like, we got to have these things, but really feature 1, 27, and 38 are really important. SOC 2, compliance, security requirements, scalability, price points, ROI from the CFO office, gives me new tools and capabilities for my marketing and sales team, etc., etc. Okay, so that's KPCs.

Now, willingness to pay. Willingness to pay is, how much, how painful is this problem to me? How much am I willing to pay? So sometimes that can be on different dimensions. It can be, I do a lot of these things, so I need it to be really, really fast.

So instead of a week for shipping, I need a day. Or instead of this transaction to process and take a bunch of time with a bunch of people reviewing a number of steps that could take a week or five business days, I want to collapse that into like one or two business days. So that's speed.

The other one could be just better quality. So you could argue about this, but let's take the smartphone example. I want to have more storage space.

I want terabytes of storage instead of like 256 gigs. And I want, you know, three 48 megapixel cameras instead of just one because I do a lot of vlogging, let's say. And so it's just a better quality product.

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It uses premium materials. It's a more bespoke service. It's the Ritz-Carlton rather than, you know, a budget motel, let's say.

And then the final is price. So cheaper. So, you know, Walmart, Costco, let's say, I want this object as cheap as possible because it's more of a commodity.

It's utility. It's electricity. It's water.

It's food. It's things I consume a lot of. There's a lot of competition.

And so we're just trying to battle to get a lower cost product into the market such that more people can interact with it. You see this to the extreme on the internet, which is like free services supported by ads. So your social networks are a classic example, or your search engines are another example.

It's I want to give access to absolutely everybody, but then I'm going to change my business model where my customer, I have sort of a two headed dragon where the user who uses my product, I'd still need to keep them engaged. But really, the people and companies paying for it are advertisers. And those are my true customers.

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So that's where you get into some incentive misalignment, which can cause problems. And so that's why you see some of the mechanics on the internet, for better or worse, being tied towards just engagement and retention and like value extraction in the service of the advertiser rather than the end users. So, you know, that's a debate for a different day.

There's pros and cons, obviously, like the internet has a great public good, but we need to capitalize and fund it somehow, in order for people to use it and provide value and create a business and create an economy out of it. So that's willingness to pay. So we've hit key purchase criteria, KPCs, we hit willingness to pay.

Willingness to pay is, it's lower for commodities, I have a million options. So this old Peter Thiel line is competitors, competition is for losers, which basically means you go into a place where there's no competition, and you're the only game in town, and you capture the entire market, which means there's higher willingness to pay, there's higher profit potential. But because of that, it will then attract new entrants and competitors to take out a slice of that profit pool, while it still exists.

So higher willingness to pay is along those three dimensions. It's, you know, I cut the price in half, holy moly, it's like a sale. All right, like, all of a sudden demand increases.

That's basic supply demand economics, or faster, like I got it 2x faster. That's pretty interesting. I'll check out Amazon again.

And then the last one is better. Better is really hard, because that's quality. It's craftsmanship, it's made by hand, it's care, it's really like a love of the game.

And so that is the one where there is very little competition, because it's really difficult, especially over long time horizons. So we like to lean into quality, better and faster. We don't really lean into cheaper, that's pretty obvious.

It's just go beat up your suppliers, like process improvement, and just extreme optimization. That one is obvious. While some of the elements can be more difficult to do that, it's an understood, well played game by many.

Quality is a less understood, less played game by a few. We are the few, the proud, the quality. Shout out Marines on that one.

And all of our servicemen and women around the world, thanks for keeping us safe. And having strong core values, we appreciate that. Okay, last thing, pricing strategy.

We're not going to go too deep into this. People have, there's people spend their entire careers figuring out pricing strategy. But I'll talk about one concept, which comes from economics, you can look this up later.

It's elasticity of demand. And this gets back to our like willingness to pay and key purchase criteria. Elasticity of demand, there's two types, there's inelastic and elastic.

It's getting pretty technical here. It's like B-school 101 stuff. Inelastic demand means it doesn't matter what the price is, I'm just gonna buy the same amount.

And sometimes it's like, oh, even because it's a higher price, I'll pay more. Those are your luxury items. Those are things like your luxury fashion houses.

Those are things like the luxury hotels, things like luxury cars. And it's because of a virtue signal, but also like the history of the brand and the values. And the fact that they've been around since before we were even alive.

And the craftsmanship, the quality that's around them. So and then the service and the personalization and the bespokenness of all of that. So that's inelastic.

Elastic demand is something that's more like, as the price changes, so too does the quantity sold and the demand on that. And supply can have an impact. So as I make things cheaper, I put things on sale or I produce a product that's maybe half or a quarter of the cost, then demand kind of goes through the roof.

And so what you can do over time as you have a product or service is you can test the market. You can test different products or services at different price points along that curve. And over time, you start to develop sort of a scatterplot of like how much is bought and sold at each sort of price tier.

And you can draw a line. And the slope of that line inelastic is like up and down. I'm willing to pay any price regardless of demand.

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And elastic is more like flat. And so over time, like you can test the market. It's like if you double, this is the old test.

This is like one of the fastest growth levers on the planet. But be careful, you can't do this all the time. If I double my price and customers buy more than half, you just made money.

So let me say that again. You double your price, you would expect half the people to buy it. But if you double your price and more than half continue to buy it, you have more of an inelastic good on your hands, an inelastic product or service.

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Which means customers value your thing so much that they're a little they care less about the price. It's not one of their key purchase criteria. So do you see how this is like a big triangle and each of these things on the triangle kind of like linked to each other and you can have different shapes of that triangle? So that's a little bit on pricing strategy.

And yeah, it's early this morning. So you may not have even had your cup of coffee yet, but or your tea or your water or whatever your wellness shot. So go make some coffee, stay hydrated.

And yeah, reach out if you need help on thinking through some of this stuff or how you work through the details. It's critically important the decisions you make for each of those three things because each of those is how you craft differentiation in the market. And it also impacts the product, the service, the team, the market, the brand, the values.

So these things are all interconnected. Great. That's it for me this early morning.

Yeah, sun's not coming up for a while. So have a great day. Enjoy your conference calls.

Step out in nature. Get some fresh air. It's a little cold out here.

Maybe you've been seeing my breath. All right. That's it for me.

Have a great day. Talk to you soon.