How to think about pricing
A.T. Gimbel shares a few ways to think about pricing in terms of value, constructs, and price point.
Value, Constructs and Price Points
One of the many challenges I hear from entrepreneurs is how to think about pricing. Where do I start? What model do I use? How do I know the price is right? Here are a few ways to think about pricing in terms of value, constructs, and price points. Remember, as a general rule most startups underprice because they are worried about appearing too expensive and don’t communicate the value their solution brings to solve the customer’s problem.
Before getting into any pricing details, I like to frame pricing in terms of value created. At the end of the day customers buy products to solve problems, and if you are delivering value to your customers that is worth something. So start with what value your solution is providing and quantify that. Are you delivering hard value (direct revenue lift or cost savings), soft value (efficiency or time savings), or other value (regulatory requirement, insurance). Using the ROI calculator is a great way to have these discussions and test assumptions with your potential customers.
Once you have quantified and can speak about the value your solution provides, another dimension of pricing is the construct. Do you want to charge a flat fee ($X) or recurring fee ($X/month)? Does the pricing adjust based on variables (i.e. $X per transaction, or $X per user based on different tiers of user counts)? Do you want to participate in any shared savings together via a contingency model? Should there be any upfront implementation fees? Choosing the right construct probably depends on the nature of your product as well as how your customers prefer to pay for services. But know that you can tweak your pricing construct to increase your chances of success.
Actual price points
So now that you have defined the value and chosen a pricing construct, what actual price point do you charge? Starting with the value you quantified, you want to make sure there is some ROI on that value (at least 3-5x minimum) so if you are delivering $100,000 in value, the price should be no higher than $30,000. You can analyze your cost structure to ensure your price point delivers acceptable margins (yet still within the value equation). You can apply discounts if necessary; although if you go this route I highly recommend a marketing exchange for that discount (i.e. webinar, white paper, case study). The neat thing about pricing in startups is you can quickly pivot. Try something, and if there are no complaints consider raising your prices. If there is pushback, adjust accordingly. Either way, you can learn a lot.
There are many factors involved in pricing, but also remember it needs to be simple. If too complex, your customers will get confused and in turn lose trust in you. So define your value, select your construct, pick a price point, see how customers react, and go from there!