It’s a question that strikes fear into the heart of the most enthusiastic entrepreneur. Pricing is always a tricky business, especially when you’re a startup offering a new product or service.
Finding the right answer to that question matters. In a postmortem of 101 failed startups, 29 percent of founders cited running out of cash as one of the top reasons for failure, while 18 percent cited pricing/cost issues.
For startups looking to build awareness, the tendency is to offer free samples, free shipping, or deep discounts to get people “hooked.” This isn’t necessarily a bad strategy as you’re building a market footprint, but failure to manage promotion without considering your margins or by promising too much can put your growing business in a poor position from the start.
· Maximization: This strategy looks to maximize short-term revenue growth by getting the highest possible price on each sale.
· Penetration: This low-price-wins model is intended to dominate market share. It lowers adoption friction and acts as the foundation for building a long-term relationship based on trust.
Use this strategy with care. Startups sometimes use the low-price model to gauge interest in a product; however, often that interest comes from people who just want to try a new thing rather than viable prospects with the potential to become long-term users.
· Skimming: Startups using this model maximize price with a high-end version and then broaden the market by offering lower-priced options. This is a strategy common in consumer hardware, where companies like Apple sell leading-edge models for a premium as well as older models at a lower price.
Regardless which of these (or other) pricing models you align with, there’s another must-know factor that can make or break any pricing strategy: perceived value. Ultimately, the customer doesn’t care if you’re covering development costs or paying your rent. They understand only the value of what you offer them — and how much they’re willing to pay for it.
How to Take a Strategic Approach to Pricing
Test your model.
“That sounds about right” doesn’t make for a smart pricing strategy. Don’t settle on a price or pricing structure without first having tested it. Ideally, you’ll be able to conduct a proper market study, but, if that’s outside your budget, at least focus on developing target customer personas. These profiles will help you identify the specific prospects you’re selling to, and guide you toward educated guesses about what they value and how much they might be willing to pay.
Keep free trials short.
While there’s value in offering free trials, be sure to take a strategic approach. Shorter trials, typically those of about 14 days or fewer, prompt users to make faster decisions so you benefit from a shorter sales cycle and lower acquisition costs. It’s also critical to develop a proactive strategy that transitions customers from free trials to paid accounts.
Don’t undervalue your product.
Pricing strategies designed to penetrate can lead to super-low pricing, especially if you want to offer an attractive alternative to legacy solutions. However, as a decision maker, you also need to cover all your costs, including research, development, infrastructure, customer support, marketing, and more.
Consider prepaid pricing.
Whether you’re selling tech platforms or marketing services, moving customers onto a prepaid structure can help even out revenue over a period of months. Typically, but not always, prepaid pricing delivers additional value to the customer, often in the form of a discount. Startups selling a platform might provide annual plans, while businesses offering creative services or consulting might move clients toward retainer contracts.
Take the murkiness out of answering that dreaded question: “How much?!” Develop a strategic approach to pricing now to better position your startup for long-term success.