The price of everything and the value of nothing. This Oscar Wilde quote reflects much of today’s business environment, discount retailers have flooded the high-street, online models offer seductive monthly subscription pricing options, and ‘pay-as-you-go’ enables contract free flexibility.
But the essence of Wilde’s quote – it’s useless knowing the monetary price of something and not understanding the non-monetary value to your customers – is the challenge faced by startups. A business is defined by the value it creates for its customers, yet many startups are weak sellers, attempting to dazzle customers with headline free trials and discounts, seeking to mask the true price because they feel unable to justify their charges. Immediately they are undermining the value they seek to create – or don’t even attempt to articulate their value proposition in the first place.
Startups struggle in developing a pricing strategy and often opt for a play which misses opportunity, due to their lack of insight into their drivers of value, and simply focus on ‘what’s the market price we can get away with’. Many default to a cost-plus pricing model – take all your costs and add your profit wish. Pretty simple. Pretty awful.
Many startups make pricing decisions in a seemingly random and detached manner. This is understandable to some extent, as they lack self-belief and customer intelligence. They have pressure on their cash runway to execute, however, given pricing is such a strategic play in your business model, making a ‘bet’ isn’t good enough.
Startup pricing is more art than science. Getting pricing right requires an experimental mindset and willingness to have a bold dialogue with potential customers. Each conversation is another signal telling you if you’re moving in the right direction, or if you need to pivot. There are a number of bad habits and pitfalls to avoid, for example:
Prices are developed without customers You can’t figure pricing out without engaging customers. All the answers are in your customers’ heads not in your spreadsheet, so get out of the building.
Prices are set in stone, not in motion Founders often pick a price, get early confirmation, and declare ‘this is the price we’re taking to market’ but then get nervous and end up with a series of random prices as they seek to close deals by offring spur of the moment discounts. Your strategy should be to pick a pricing starting point and stick with it for a sufficient period of time to provide validated learning.
The price is too low Even confident founders price low. Instead of letting the market tell them where they’re not going to win deals, founders talk themselves into the discounted side of the pendulum. If you start from a low price, you’re already capping your revenue growth.
Offer immediate discounts or for free In my experience, many undercharge from the outset, offering immediate hefty discounts, or worse still, stuff for free. If you’re selling a product or service that’s unique to the market and packed full of innovation then respect yourself and charge a premium price.
‘Free’ and ‘Discounts’ are two are my major bugbears. They should be banned from the Founder lexicon. Many startups offer ‘free trials’. This is a no-go for me, instead implement a Freemium strategy. With free trials, you are putting the onus on time. With freemium, you get the opportunity to own the relationship and create an ongoing conversation. Your user may or may not be using your product, but at least with freemium you’re not pushing them into a decision. Freemium is an acquisition model, a measured strategy to unlock lower CAC at the top of your funnel.
Similarly, many offer discounts because they are a startup and don’t have a brand, or many established customers, and lack confidence. Discounts are effective as a tactic, but only as a scalpel, not a sledgehammer. Use them sparingly, in the right situation, and always time boxed, for example, offering a beta user a discount for an initial trial period, but then revert back to full price on commercial terms.
Free markets tend to undermine themselves from the bottom upwars, as Marx identified, which is why we see a race to ‘cheapest price’. Many are besotted by ‘market rates’, but as Economist Paul Krugman says, this is beauty clad in impressive mathematics for a convenient truth.
Price differentiation is the key enabler of growth and shapes the customer’s perception of value, so you must be prepared to lose some sales at the wrong price on the path to profitability. My preferred new product pricing strategy for startups is based on a customer centric approach, defining your customer segments as accurately as possible and generate data about them that validates your pricing. How does this method work in practice? Here’s a four-step approach
Step 1: Define your customer (profiles)
The first step is to define clear customer profiles or ‘buyer personas’, data-driven role models that represent a customer segment. A good buyer persona vividly describes the demographic background of a potential customer, the way he/she would use your product, the motives he/she has and the buying behaviour that this person exhibits. Let’s take the example of a CRM cloud-based solution company. Identify potential target market buyer personas such as:
- New Business Nyree. Nyree is a smart and focused freelance marketing professional, a go-getter who wants to move fast, crack on getting growth using the latest marketing techniques, automation tools and use of data. She is canny though and wants a deal.
- Idiotic Ian. Ian is a sales director in the hotel sector, wants an easy life and has a big budget, he’ll pay for any solution that takes his fancy, he’s not really focused on value for money or ROI. He’ll research the market but often goes for the safe, existing household name solution.
- Hard Working Harry. Harry is a successful old school sales manager, believes business is all about who you know not what you know, lives on face-to-face meetings. He relies on spreadsheets built over the years, with two members of staff keeping them up to date.
These hypothetical customer personas segment and target different buyers across your market, forcing you to recognise different buyer behaviours and motivations and thus feed into both marketing and sales strategies.
Step 2: Why will they buy from you?
What’s the problem you’re solving for each persona? The next step is to assess what value your product or service provides to the different buyer personas identified. Your offering probably has different features or benefits that, individually or collectively, solve a customer’s problem. Nyree will have different challenges to Harry, and the features or benefits offering value to Ian may not necessarily result in value for Nyree. Features and corresponding benefits should therefore be fine-tuned to the different customer profiles. The strategy is to then price accordingly. Here are some examples.
- Nyree will use software to share blogs, social media posts and newsletters with her customers and prospects. The CRM provider could offer a free version for three months of its platform to Nyree, showing a more efficient and integrated approach to her marketing efforts, giving a dashboard of metrics and a single unified view of each customer at her finger tips. As Nyree’s marketing efforts grow and customer traction increases, she’ll see the value first-hand and will switch to a paid account. A monthly subscription pricing model would appeal to Nyree.
- Ian keeps on with a rolling contact programme to all customers, he has no view on lapsed customers, spend profiles or ability to segment the customer base. He has thousands of email addresses on his database. Ian needs educating in the value of a cloud-based platform with automation features, and the availability of dashboards with key information visible at a glance. Ian has an established and profitable business and is therefore able to pay more than Nyree, so a price point based on the cost savings and revenue growth attainable by switching to a more agile and data driven solution.
- For Harry, an initial project to build the business case is needed, transferring his data to the platform, showing the benefits of cloud technology re data security and the ability to integrate with his finance and operating systems – your data has value Harry. The price here can start low to build confidence and adoption, turning his two staff members from sales administrators with low job satisfaction to outbound sales navigators, using data for prospecting and lead generation. Price based on features of the platform like Salesforce would apply.
Step 3: Validate the pricing per customer profile – experiment with hypothesis
After you have defined your buyer personas, the next step is to validate the pricing for each buyer persona. There are many ways in which you can validate pricing. The ultimate form of price validation is of course a paying customer, but what if you do not have a product or service to offer yet? How do you validate your pricing?
Start by checking out competitor pricing. Which features do they offer for which prices? Which needs of which buyer personas do they seem to address? The answers to these questions give you a great starting point.
To support this pricing experiment, set up a landing page with a clear call to action. Have your website visitors sign up for different plans offering different features and prices that match with your expected buyer personas. Experiment with both the prices and features and track the conversion to ‘send me more details’ responses. To attract visitors to your website, you could perhaps invest in paid social media or search engine advertising.
One result from this experiment maybe be that you find out a certain buyer persona builds no traction, a customer segment you deliberately do not invest time, money and effort in.
Step 4: Launch a value-based pricing strategy
Now that you have defined your buyer personas and validated the pricing feedback per persona, you understand who you are selling to, and the perceived value of your offering, so apply your pricing in a way that clearly demonstrates on which axes your prices are based. Don’t sell your offering, sell the outcomes to validate your price:
- Features – the product innovations that deliver new outcomes compared to competitors
- Benefits – this is what it will do for you (specific to the persona)
- Impact – the quantitative and qualitative return, impact and outcomes
- Evidence – proven from pilots and testimonials
Just to be clear, I’m using the term ‘quantitative’ to mean the measureable financial impact of the product to increase revenue or decrease costs (i.e. create profit) rather than the huckster’s definition as ‘we’re great value, the lowest-priced product.’
This approach secures a willingness to pay for your product as it clearly aligns with the customer’s needs, you’re charging for value metrics you have validated with them for the problem they have, you have genuine user understanding. By placing a premium on their opinions, you are focusing on the right people for your product who are making the buying decision. After all, value is in the eye of the beholder.
So, the key considerations in a startup’s pricing strategy are:
- Establish the right pricing culture. Be a value pricing startup that prices to the value created for customers that they recognise
- Establish a pricing strategy and make it a core competency, apply it confidently and consistently. Don’t set it and forget it, stick to it.
- Price on purpose. What are you really selling, what are your customers really buying? A florist isn’t selling flowers, it’s selling love; Dulux don’t sell paint, rather the colours of life; Harley Davison don’t sell motorbikes, it’s adventurous lifestyles; CRM companies don’t sell tech, they sell innovation delivering efficiency and effectiveness in sales, improving sales ROI.
- The most critical input for your startup is the voice of the customer, not your product. Don’t fall into bad pricing habits and stumble into clumsy pricing conversations.
- In sales calls resist customers jumping the gun to talk about pricing before you’ve unpacked and explored the value fit of your offering to their problem – never panic or prematurely discount if there’s pushback but continue to fact-find around constraints and their challenges.
Don’t get stuck by pricing in articulating your value proposition – money is the applause, not the reason you’re here. Pricing is a signal, a way to message expectations. It can anchor our thinking, but if we’re not careful, it can be an anchor that also drags us down. Develop a pricing strategy to get on the same side of the table as your customers, and you’ll close lots of satisfied prospects.