Getting the Price Right

One of the most common challenges faced by early stage start-ups is setting the price. And, in my experience, the single most common mistake is setting the price too low. Early stage founders fall into the trap of setting a low price out of fear that customers won’t buy if the price isn’t low, or they adopt a compete-on-cost strategy as a default because they can’t identify any other competitive strategy or they settle on a price by comparison with a similar product (How many times have you heard: “I’m going to charge €4.99 for my app because that’s what apps cost on the App Store.”?) 

Getting the price right is critical to building a scalable business over the longterm. Too high and customers won’t buy, but too low and valuable profits are lost, profits that could be invested to scale the business. But getting the price right is just as critical at the early validation stage of the business. It’s no good if customers only use your product when it's free or cheap but not when there's a price to be paid. And if that’s the case, the sooner you find out the better.

A good starting point is to understand the basis for setting your price - it is based on value to the customer, your costs or comparison vis a vis competition or alternatives?

Value pricing is where the price is based on the benefit to the customer. If your product or service saves your customer €10,000 a year, why can’t you charge €5,000 for it? Or even more? Effective value pricing requires that you have an intimate understanding of your customer, enough to be able to put a monetary value on the benefit of your product to the customer. I always advise tech start-ups to work hard to establish a value pricing model.

Cost based pricing is where the price is based on the input costs plus a profit margin. It’s important to understand your cost base in detail, including up front development costs; these need to be recovered too. And if the customer isn’t prepared to pay this price, it’s time to pause, ponder and perhaps pivot.

Competitive pricing is where the price decision is influenced by what a customer might pay for alternative solutions. I advise tech start-ups to find a way to differentiate and to avoid offering a product directly comparable to an existing one. That said, it’s worth noting that customers often infer product quality from price, so undercutting the alternatives can sometimes backfire. And it is only sustainable if the cost base is lower than that of the comparable alternative.

Once you have set the price, test it with early customer engagement.

• Charge your full price as soon as possible. It’s the best validation of the market need. And it helps cash flow too!
• Maintain the price but be prepared to offer conditional discounts if that’s what it takes to get early customers over the line. A higher price and conditional discount is better than a lower price.
• Have a back-up plan if the customer baulks at the first price. Be prepared to offer a lower price but for a lessor product. A tiered pricing strategy where reduced functionality is available at lower price points is commonly used in SaaS models and can be applied to lots of products.
• Don’t confuse pricing and payment terms. It’s better to provide 30 or 60 days credit on first payment than it is to offer free product for the first month or two.

And remember, if all your customers accept your price without question you are not charging enough!