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Thoughts on startup pricing strategy: money is the applause

May 21, 2018

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’ is an established enabler of contract free affordability.

The very essence of Wilde’s quote is that it’s useless knowing the monetary price of something and yet not fully understanding its true non-monetary value to your customers. This is the challenge faced by all startups.

Yet often startups struggle in developing a pricing strategy and opt for a play which misses opportunity, due to their lack of insight into their drivers of value, and simply focus on ‘that’s the market price we can get away with’. Many default to a pricing model based on an accounting principle known as cost plus – take all your costs (salaries + materials + overhead) and add your profit wish. Pretty simple. Pretty awful.

Many startups make pricing decisions in a seemingly random and detached manner from their go-to-market strategy. This is understandable to some extent, as early-stage entities lack self-belief, branding gravitas and customer intelligence. They have pressure on their runway to execute, however, given pricing is such a strategic play in your business model, making a ‘bet’ isn’t good enough.

It sounds obvious, but pricing drives revenue, it underpins your overall go-to-market approach an ultimately profitability, so you need a good sense of where to start, and be confident in pricing experimentation as part of the learning and iteration process.

Startup pricing is more art than science. You have no anchor to customers, but you have to start somewhere. Getting pricing right requires a confident, experimental mindset and willingness to have an honest and 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 as benchmarking research. All the answers are in your customers’ heads not in your spreadsheet, so get out of the building. A startup has to prove it can solve a problem and then develop a repeatable, scalable sales process for customer discovery, validation and growth. Pricing is an integral element to this model.

Prices are set in stone, not in motion Founders often fall into a common trap: they pick a price, get early confirmation, and declare ‘this is the price we’re taking to market’. They have a hypothesis to test, but then get nervous and lose this focus, and end up with a series of random prices as they seek to close deals. Your strategy should be to pick a pricing starting point, and stick with it as a permanent solution for a sufficient period of time to provide validated learning.

The price is too low Even the most confident founders price low. Instead of letting the market tell them where they’re not going to win deals, they’d rather price low and end up trying to interpret where on the pricing spectrum they’ve landed. That’s how founders talk themselves into the discounted side of the pendulum. If you’ve already started from a low price you’re already capping your revenue growth.

The pricing structure is complicated Many early pricing pitfalls are rooted in trying to innovate too much on pricing structure. Customers are used to buying in a certain way, such as a monthly fee or per transaction. Anything too far from this, which you may regard as ‘innovative’, can be a barrier for customers to understanding and adoption. Startups must maximise their learning per conversation around pricing.

So take a step back. Pricing is a pathway to the market, so it must serve the strategy through which you hope to get a foothold. Before you begin experimenting with pricing, get clear on the main driver in your early go-to-market strategy:

• Getting your first referenceable customers – who are your ‘famous five’ whose badges represent credible testimony?

• Securing targeted, specific large customers where you can build a footprint to scale long-term revenues

• Maximising revenue across a number of targeted customers in a specific segment

• Gaining widespread market share and brand awareness

Each of these goals has a different pricing optimisation, often exclusively. Statistics show that as few as five customer development conversations provide 80% of the price testing and learning you need. You can apply the takeaways and adapt the next experiment. You need a different set of customer development questions depending on where you are with your pricing experiments.

Here are a few of these questions to consider for customer development conversations for early or neutral prospects:

• What is the last similar solution you bought? Tell me about your evaluation process.

• If I told you that I have a solution to [insert pain point], would you be interested? Why?

• What do you think is an acceptable price for a product that solves this problem?

• What is an expensive price?

• What is your budget for a solution?

These customer development questions are part of getting a more informed understanding of how customers think about your product, and helping you to define two key inputs to help shape your pricing strategy that follows:

Your upper price ceiling This is the highest price the market signals for the value you provide. Force yourself to test this, even if it means getting into the uncomfortable zone of pushing for a higher price, you need to find it. You’ll get pushback and refusal, but if you’ve done a good job showing the value of your product, prospects will be interested. I’ve worked with tech product startups where we’ve gone from £5k to £20k in price testing the ceiling.

At a certain point, price can be a barrier and even if prospects value your product, they may delay or defer purchase. But the key here is that you’ve identified your upper ceiling, and now decide whether pricing at this point is strategic or counter-productive to growth.

Your anchor Your anchor is an alternative that customers compare your product against. What are you replacing? Set the anchor to something the customer understands. Make sure you find an anchor that gives you a price point that’s high enough. Don’t expect your customers to figure this out on their own, it’s up to you to paint the full picture. The goal is to get data that will really give you confidence in your upper ceiling and anchor.

Once your customer development conversations provide insight into these two factors you can shift your focus to the more robust pricing conversations that you will run, but you now have a range. There will be times where the customer is pushy and you need to deliver a price. The best practice is to deliver a range. When you’re testing the market, pricing is inherently a nerve-wracking conversation, but one you must embrace to get confirmation that customers see the value of the product.

The goal is to validate the tangible value your product offers and get customers to move themselves to your price point. If a customer baulks at your price offer, they are saying ‘this solution to my problem does not provide enough value’ – but don’t take that as a signal to reduce your price, rather it’s an opportunity to recognise they are not rooted with sufficient knowledge of your offering, so go again. After this, if prospects still don’t get to that point, you’re wasting your time, as they are buying based on cost, not the value of your product.

In addition, conversations not only allow for adjustment, but also set the tone for follow-up. They may not be able to give a specific price that works now, but don’t panic. You have more than one shot, don’t knee-jerk and panic to get a deal closed today and offer a discount, who knows what’s going to happen. Both parties have invested time at this point, an instead of jumping to a discount, foster empathy.

Don’t be afraid to own up being an early-stage company, along with the constraints that come with that, explain your seeking to understand what is a valid price point for the value you’re providing.

This type of exchange reframes the sales conversation and gathers further intelligence. No matter where you start with pricing, at some point, your structure will change – you may introduce new product features, enter a new segment, or develop a different go-to-market strategy. Maybe your ideal customer profile changes. Each of these scenarios alters the equation, but until that point, develop a minimum viable process to help determine your early pricing.

Free markets tend to undermine themselves, as Marx identified, from the bottom upward – which is why we see a race to ‘cheapest price’. Many business people are besotted by ‘market rates’, but as Economist Paul Krugman says, this is beauty clad in impressive mathematics for a convenient truth. Equally, opportunist pricing can make short-term gains, but don’t get too rosy eyed, markets can be easily bewitched, and scoundrels seeking easy exploitation ultimately fail.

Be confident and curious in creating and capturing value for customers. Be obsessed with value, your clients will appreciate it. Many startups take a ‘case by case’ opportunity basis to pricing, and convince themselves ‘this is a big new client, it’s a valuable opportunity, we’ll reduce our price to win the job’. This is flawed, negotiate and fix the commercial expectation. Respect yourself and your business. Do you want to haggle over price, or do you want to showcase the ideas that will give you innovation, growth and success, as the basis for your pricing?

So, the key considerations are:

Establish the right pricing culture in your startup Be a value pricing firm that prices according to the external value created for customers

Establish a pricing strategy and make it a core competency There’s a big difference between listening and waiting to talk. Establish the floor and ceiling price by being confident and clear about the value you create.

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, they sell the colours of life; Harley Davison don’t sell motorbikes, they sell adventurous lifestyles; software companies don’t sell technology, they sell innovation.

The most critical input at an early stage startup remains the voice of the customer, not your product. Don’t fall into the four bad habits identified earlier, and stumble into a pricing conversation. 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.

Don’t get seduced by the numbers in articulating your value proposition – money is the applause, not the reason you’re here.

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