Getting your startup pricing strategy right is like cooking – it is neither a science driven by numbers and data, nor is it an art based purely on instinct and ‘inner feelings’; it is, of course, both!
This is the first in a series of three articles on pricing – to check out the other two articles – jump to the end.
Is Your Startup Pricing Strategy Right?
Getting your price(s) right is the core to a successful startup. Once we’ve identified the customer pain, engaged the zeal of change, figured out our first user and how we are going to deliver our services or products, the next big question is ‘how do I price this?’
Firstly, just to note, pricing is typically treated as a poor cousin to the actions listed above – in that it is often an afterthought. That is a mistake that lots of us make – myself included. In fact, it wasn’t until my 4th iteration of the Breakthrough Startup Canvas that I explicitly separated out ‘price’ as one of the six critical components to a successful startup business model.
Also, once you’ve ‘solved’ your startup pricing, it is then a relatively simply calculation to work out the financial resources you need to make your startup a success. (Note, if you are already scaling, then this thinking might apply to the launch of new products & services or potentially, to new markets for existing products; or relaunch if your scaling isn’t fast enough).
So, given that pricing is frequently treated as an afterthought, you can speed your success if you make it a priority.
Gaining a Startup Pricing Strategy Advantage
Think of the advantage like this: really great direct marketeers (you know, the ones who wrote sales letters and actually posted them to you) learnt to start developing their campaigns by beginning with the order form and the offer (or ‘special’ price).
From this point, they worked back to the copy and the headlines and design that was needed to get you and I to complete and return the order form (and accept the price). Average direct marketeers just begin with the headline!
When it comes to pricing, it’s a similar process.
Once you’ve worked through the product development / market fit stages to arrive at your initial price – you then run the process backwards; that is, start with the price you want* and then redesign the product / service and brand to deliver it. Then run this process back and forth, as an iterative process.
(*when I say ‘the price you want’ – I’m inviting you to imagine a fabulously well-resourced company that has the money to allow you to expand and develop your products and business)
So, how might you go about thinking through your price?
Here are some obvious points that might determine your price:
- what is the maximum customers will pay?
- and, what value do customers ascribe to your product /service?
- and, what does it cost to produce your product / service or run your enterprise?
Okay, get any of these wrong and you are probably building a loss-making business. 🙁
However, here are some less obvious pricing tips:
- what are (or might) your competition doing/do?
- can you run your business at a loss to destroy your competition and dominate a market?
- how long (and therefore, how much does it cost) does it take to land a customer? Tip: consumers, between 1 and 7 visits to your website/ digital messages; enterprise, between 3 and 23 months of business development.
- can you run and justify different prices for different market segments or different geographies (so can you add necessary services or value to enterprise purchases that consumers or freelancers don’t need)
And then there’s a really unobvious pricing tip:
– do your prices *appear* fair?
Okay, prices appearing fair, hmm… what does that mean?
Here’s a fair price story:
Three behavioural economists asked if it was fair to raise the price of a snow shovel from $15 to $20 after a snow storm?
The answer was, no. And crucially, to do so would damage brand, reputation and probably future sales, as these behavioural economists also demonstrated that people will even inflict ‘economic disadvantage’ on themselves if it prevents someone from acting unfairly.
So, what does it means that your prices have to *appear* fair.
That means, we need to:
- be able to rationally explain prices in a way that our customers understand; and
- once we establish a price, we are kind of stuck with it; and
- if we do change price, make one single change – again, for a justifiable and transparent reason, rather than bouncing prices up and down to ‘optimise’ profit.
Of course, once a price is set, you can always discount the price – and customers will accept that discounts come to an end or are removed but not that your just ‘jack your prices up because you want to make a profit’.
Equally, constantly moving prices undermine confidence and reduce sales’. Or, I should say, constantly moving *price structures* undermine confidence and reduce sales.
(‘note, customers don’t like change in price or price structure – that severely limits your ability to test and trial prices. That is why it is so important to get it right from the outset).
How to create a pricing structure as a part of your startup pricing strategy:
Take Zoom as an example. They have three pricing options – Pro, Business, Enterprise – (if you treat the ‘free’ plan as a marketing strategy) – and these are based on three things;
- Pro – price per host, up to 100 participants, from 1 to 9 licences
- Business – price per host, up to 300 participants, with company branding, for 10 or more licences
- Enterprise – price per host, up to 500 (or even 1,000) participants, with dedicated support, for 100 or more licences
This structure shows how people and organisations pay different prices – transparently and fairly.
For instance, if I want to host 450 people, I need the Enterprise solution, which is €189.90 per host – but I have to buy a minimum of 100 licences – so my bill will come to at least €18,900.90. This is a lot more than the €139.90 that a freelancer pays.
So it turns out, we have three criteria for making pricing decisions:
- Firstly, what structure do we use?
- Secondly, what is the maximum price we can charge?
- Thirdly, what is a ‘fair’ price?
A useful exercise is look at zoom’s pricing structure and ask; Is the price structure clear?; Are they charging the maximum amount (or too much, or too little)?; 3 Is the pricing ‘fair’? In fact, copying (and then adapting) someone else’s successful pricing structure is often a good idea!
To apply these insights to your startup pricing strategy, ask yourself and your team this question:
What would need to happen to our brand and our product to justify a price twice as high?
The value of this question is that it both opens up the possibility of radically different pricing and also asks what our brand AND product needs to do to justify those new prices. For instance, a designer who becomes famous overnight can double his / her prices, right? And we accept that this is fair, don’t we? Okay, so what would need to happen for your business to double your prices?
Remember, some businesses are predicated on low prices / efficient prices, so doubling the price might be a non-starter, but nevertheless, try it as a thought experiment – because it may lead you to new ways of generating revenue.