PRICING SET-UP FOR START-UPS
How to set the right price for your service/product
As accelerator start-up mentor , I was quickly challenged by one of our startup on pricing strategy. Once you have understood that benchmarking pricing is useless (you don’t want to make the same mistakes than others) and that cost based approach minimize your value, It remains a client centered approach (which is the only approach that most of entrepreneurs I have seen don’t know how to crack)
That means that you will have to understand the value perceived by your clients in order to be able the set the right price.
Since in accelerators, you can’t be theoretical (start-ups don’t care about bullshits, they need to build practical solutions !), I dug deeper into the subject to come with a practical approach to define the right price.
THE LEAN METHODOLOGY APPROACH TO SET UP YOUR PRICING DEFINITION PROCESS
As describe in Running lean, Ash Maurya’s book, one of the methods you can use is as simple as :
- Define a fair price (according to you ;) and raise it a little bit (we all have the impression than the price is a big problem for customers and have an inclination to lower it)
- During your solutions ITW (done in order to test your solution) expose your offer including the price and observe the reactions
- Iterate and adjust depending on the reactions and the willingness to pay
- When the interviewee accept the price but still showing some reserves, you have found the right price.
- Confirm it by running a quantitative study
For more details you should report to Ash Maurya’s book.
In my opinion, based on experiments, this methodology has some biais due to the way you will present your service. Indeed most of the time, when it comes to pricing, the ITW will turn into sales and the risks are that the person in front of you say yes to please you (we all want to please the person we are talking to) or sometimes you can hard sale it.
Anyway this is a very good method to set a price rapidly before releasing your MVP. Price is so important that I recommend to use another method to validate your product original price. This method will be described below.
MEASURE YOUR PRICE SENSITIVITY
Measuring your price sensibility will allow you to have a good vision of the value perceived by your targets. Before going to measuring it, you need to have a strong understanding of your market and targets and work on your buyer personas.
Indeed each of your personas will have a different value perception, that’s why you will have to measure each price sensibility for each of your segments independently.
As we are talking about start-ups, and to be more specific, early stage start-up, I will describe a method that does not required a large sample of prospects or clients because abviously, you don’t have the luxury of a substantial customer base.
Use Van Westendorp’s Price Sensitivity Meter
Van Westendorp’s Price Sensitivity Meter tackles the problem of measuring price sensitivity by surveying people about their willingness to pay in ranges. Each respondent in the survey is asked four questions:
- At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
- At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
- At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
- At what price would you consider the product to be a bargain — a great buy for the money? (Cheap/Good Value)
By asking those 4 questions to a significant amount of prospects/clients, you will be able to draw 4 curves (cumulative) per persona,
and deduct an acceptable price range and an optimal price by drawing the curve of percentage of sales loss(too cheap + too expensive) function of the price.
And here we are, to my knowledge this is the only “scientific” method to determine an optimal price point based on product value.
The VW method should allow you to post-validate your early pricing hypothesis and could be run later if you want to.
PRICING IS A PROCESS
Whatever the method you use (even cost plus or competition based approach) pricing is a process and you will have to iterate often to maximize the sales volume AND value. The value perceived can change from one customer to another and from one month to another.
I recommend to run theses analysis for every segment you plan to target and at least once a year.
References :
- https://en.wikipedia.org/wiki/Van_Westendorp%27s_Price_Sensitivity_Meter
- Van-Westendorp PH,(1976), NSS Price Sensitivity Meter — a new approach to the study of consumer perception of price. Proceedings of the 29th Congress, Venice ESOMAR
- Running Lean, Ash Maurya
