Let’s talk about how much you should charge customers for something when you’re not totally sure what that thing is yet.
A startup has to get its pricing right or the product will be dead at launch. The problem is, there aren’t a lot of hard and fast rules for pricing a brand new product. It’s an individual exercise, and the right answers are specific to your market, your company, and the as-yet-unknown value of the product to your customers.
Throw in the uncertainty surrounding a minimum viable product, and the pricing process usually generates more questions than answers. I know. I’ve been there. I’ve spent weeks there.
But having launched dozens of digital, physical, and hybrid products to market, I’ve developed a few general guidelines that have worked for me when pricing an MVP. So before we tackle the details of our specific market, our specific company, and our specific product, let’s take these MVP pricing rules into account.
Charge For What It Will Be, Not For What It Is
If we’re not comfortable charging the full amount we plan to charge when the product emerges from MVP, then we’re not ready to call what we’re about to release an MVP yet.
So we shouldn’t release it.
When we release an MVP, the pain and suffering involved should all be inflicted on the product producer, with as little as possible on the product consumer. All the duct tape, the small tech, the running around behind the scenes — that should stay behind the scenes.
Yeah, we can get away with some clunkiness or a small bit of extra work on the customer end, but not so much that we feel like we have to cut the price in order for the customer to get the value they’re expecting. That makes us a cheap option, and that’s a hard first impression to shake.
What I’d rather do here is run a pilot with our MVP and temporarily charge a discounted price, provided we publish the full price and make it clear that the discount is only available for the duration of the pilot program.
There Is No Such Thing As Free
Don’t get me wrong, I’m a big fan of free, both as a producer and a consumer. But unless we’re being completely altruistic, nothing should ever be totally free. There should always be a catch.
If we’re giving our MVP away for free, we should only do it as a promotional program or a trade, preferably both. The promotional aspects should be limited, the product should be free only to a specific customer type, for a short time, and only up to a certain quantity.
The trade should be for contact information and feedback, and only those things. Some startups will try to use a free product model to capture market share, but I’ve found that the returns on a free product tend to diminish pretty quickly and dramatically.
First of all, our more opportunistic freeloaders are going to find ways to game our trade, and when they can no longer do that, they’re gone. Further, nobody gets invested in something they got for free, so if our product has any onboarding or learning curve, they’ll bail on it pretty quickly.
What I’d rather do, if we’re talking about using free to grab market share, is penetration pricing. This is where we charge something stupid, but something, for the MVP, like $1 for a $30 product, or $10 for a $100 product.
Penetration pricing does a couple things. One, it gets us the contact information and, in this case, even the payment information we need. Two, it puts customer skin in the game, removing the psychological permission to waste our product.
When we take a free trip or even go to a free event, we tend to unconsciously waste it a little bit. We don’t take advantage of all the amenities, we leave early, things like that. We do this because we’ve got zero stake — meh, it was free.
The same thing happens when people get a free product. They don’t give it the attention it deserves, creating the opposite of the effect we intended. But if we charge them something, anything, the psychological permission to waste our product goes away.
Don’t A/B Price the Product, A/B Test the Discount Instead
A/B testing is the process of delivering different marketing messages and value propositions to different segments of customers and learning what works from the conversion rates. A/B pricing is the process of showing different prices to different customer segments for the same exact product and then settling on the highest price that still works.
Don’t do that.
I think A/B pricing is kind of unethical and it will definitely upset customers if they catch on (or come back for more). But the main reason not to do A/B pricing is because it doesn’t work.
A/B pricing doesn’t prove out true value. In fact, it proves nothing except that some people will pay more for our product under the right conditions. That’s peak pricing. I’ll pay $3 for a bottle of water after a long workout on a hot day when there’s no other water source around. That doesn’t mean I’ll pay $3 for my next bottle of water. A/B pricing ignores all the variations of that.
What I’d rather do is hypothesize whether the product will achieve expected sales with the price points we choose, and then test with a segment just barely large enough to give me statistical significance.
That answer should be binary, not a spectrum, and our test results should include the data we need to permanently set a price, with confidence.
If we’re sold on A/B, the other thing I’d rather do is A/B test a discounting model like penetration pricing and then extrapolate those results. This can get us a larger statistical sample without pissing anybody off, because no one is paying full price. As we track the conversion rate at each point, say $1, $2, $5, and start to see resistance, we’ll get a pretty good sense of where our customers find value.
Don’t Go Premium Unless You’re Prepared to Spend
Some entrepreneurs ignore the fact that companies who charge a premium price spend a lot more to afford that luxury.
Let’s go back to the bottled water example, but in a normal demand scenario. There’s a reason you can buy one bottle of water for 99 cents and another for three dollars. Every company would be the three-dollar option if they could. But being premium doesn’t come cheap.
Both bottles contain the same product, but the premium option has added something extra to the processing, the packaging, or the marketing. Yes, it may only be a psychological component, but even if it’s just a mind trick, there are a few things to consider if we go that route.
- We need to be able to prove that customers will pay more for our guess at what creates that extra value in the customer’s mind. Is a squarish bottle going to tip the scales? Is “cold mountain spring filtered” really a thing people will pay more for?
- We need to perpetually maintain that value component. Customization always costs more to produce, and we’ll also need a stringent quality control process to make sure that our premium product never looks or acts like anything less than premium.
- Don’t ever make shit up. We need to be able to prove our product does what it says it does, always, under any conditions.
Take this to a digital model, and what premium means is that our UI, UX, customer success, ratings, and Net Promoter Score have to be demonstrably higher than the next best option. This does not happen by accident, it costs money to get there, and those costs need to be a part of our pricing process.
In the end, pricing always comes down to what a customer will pay. More often than not, the pricing equation gets tripped up not because the value of a product is lacking, but because the value of the product isn’t being communicated correctly.
A good MVP pricing process will shake out those value propositions in a way that customers will understand. It’s worth spending time to make sure our value is clear and our guesses are on target before the MVP goes to market.