6 Ways to Think About Pricing for Your Startup
Here are a few things for entrepreneurs to consider regarding their pricing. Keep it simple and go!
There’s no one thing to consider
I was speaking with an entrepreneur the other day about pricing. This area can be one of the most complex, yet simple parts of your strategy. Large corporations have entire teams dedicated to constantly optimizing pricing. For startups, keep it simple and go. Here are a few things for entrepreneurs to consider regarding pricing.
Price on value
Too often people price based on what something costs or what margins they want. While that is a factor (see below), the most important thing is pricing on the value your solution provides to the customer. They need to believe it is delivering at least 5-10x ROI. So whether you price at $100 or $1M, the value you bring informs what the customer is willing to pay. Pitch on the value you bring to their problem, not a price point.
Run some basic analysis
To the reference above, you still need to run some analysis on cost/margin to ensure your price makes sense. For example, if it costs you $200 for the solution and you sell it for $50, that will not work : ) Once you have the value, then you can decide the right construct (i.e. per month) and right price point (i.e. $1,000).
Keep it simple
When pricing is simple, customers can understand and make a value judgment. When pricing is complex with different tiers, price points, exceptions, etc. what often happens is the potential customer gets confused, or worse becomes very upset when their bill is a lot higher than they thought it would be. When they are confused, they don’t trust you, can’t articulate the ROI, and usually become cynical about your offering which makes it hard to close the sale. Simple is almost always better.
Ask for a marketing exchange
Your early customers will inevitably ask for discounts. If you go that route, make your customer commit to a marketing exchange in order to receive the discount you likely would have given anyway. It could be a case study, white paper, webinar, etc. Something that doesn’t really have a cost to them, but is valuable to your credibility and supports future sales.
Most startups under price. Don’t be afraid to raise prices and see how customers react. Worst case they complain, and you can lower the price raise. If they renew without complaining they are likely getting way more value and your confidence increases. If they churn from the raised price, they likely were not getting the value anyway.
Test and Learn
Most importantly, pricing is ever changing based on product value, market conditions, competition, etc. Pick something, put it out there, and see how customers react. As a startup, it is super easy to change your pricing at any time. Let the market tell you what is/is not working.
For further reading on pricing, see some other blogs I have written on the topics:
- How to think about pricing
- Calculating ROI: Three Different Types of Value
- How to Create and Effectively Use a ROI Calculator
- Raising Prices
- Contingency Pricing