Most startups play defense when discussing pricing with customers. They dance between asking for too little, leaving money on the table, and asking for too much, only to lose the customer’s interest. The very best companies lead their customers in that dance. They use pricing as an offensive tool to reinforce their product’s value and underscore the company’s core marketing message.
For many founding teams, pricing is one of the most difficult and complex decisions for the business. Startups operate in newer markets where pricing standards haven’t been set. In addition, these new markets evolve very quickly, and consequently, so must pricing. But throughout this turmoil, startups must adopt a process to craft a good pricing strategy, and re-evaluate prices periodically, but at least once per year.
These are the seven factors I believe founders should consider when pricing when they go to market:
The Basis for Pricing: There are three ways to justify a pricing plan. Value-based pricing charges customers a fraction of the incremental value created by the product or a fraction of the costs saved by the product. This is often seen in ad tech or any type of optimization technology. A startup increases conversions by 50% and they take 10% of the gain as their fee. Value based pricing is also employed in slightly less rigorous ways. Salesforce sells CRM seats based on an aggregate ROI of increased sales productivity for example. So does Expensify, which decreases the time to file expenses.
With cost-based pricing, startups mark up the product they sell by some margin. Many infrastructure as a service companies do this. AWS, Twilio, Heroku, etc. It’s very common in commodity or nearly-commodity industries, where customers know the prices of the components used to provide the service.
Third, competition based pricing works well in markets where the price and value of a particular type of product are well established. Startups adopt the pricing model well known in the industry.
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