As entrepreneurs, it’s almost impossible to understand the value of what we’re building. About 10 years ago, I was contacted about a consulting deal that I had no interest in. The prospect asked for my hourly rate, and I threw out an insane number just to get the deal off my back. Without a second of hesitation, the prospect accepted the rate.
I didn’t take the gig (I had to backpedal really hard to get out of it), but that was the day I realized I was undervaluing myself and my work. As I sought to make sense of why the would-be client had seemed unfazed by such a high rate, I realized that I was the one with the skewed perspective. Turns out, most of us entrepreneurs have a habit of selling ourselves short.
There are a few reasons why we sell what we’re building for less than it’s worth. We live in a world where most products are mass-produced by faceless corporations that employ thousands of people led by titans of industry. At the other end of the scale, we tend to look at our product and our company and think: This is just something I did. No matter where we are on the growth path, it’s difficult to detach ourselves from the fact that all of this came from that one idea we had and the stupid way we came up with it.
Furthermore, from the moment we make our idea public, everyone in the world — investors, customers, and partners — is trying to get us to invent, produce, and sell it more cheaply than we are. They’re all trying to cram us down, and that pressure is reflected in how we see ourselves and our young company.
Just because we’re not the cheapest option doesn’t mean we can’t appeal to the price-conscious customer.
Even if we escape that gravity, it’s never easy to make money. For the sake of survival, we must invent, produce, and sell as inexpensively as possible. Even when we get past the survival stage, we still measure our success based on margin. And when we think about margin, we always choose to acquire more customers at the expense of price. Why? Market share. The more customers we own, the more successful our company.
Once we recognize the pressures to keep our prices low, we can begin thinking about better ways to value our product.
Valuing a product is simple on paper but difficult in reality. When we think about our products — building them, selling them, and especially valuing them — we need to take ourselves out of the equation. We need to make the pricing process self-agnostic on both a personal and company level.
We should price based on the value of the product, not the volume of the effort or the magnitude of the idea.
To determine value, we can try asking our customers how much they value our product, but they usually won’t have any better of an idea than we do. They will, however, be able to tell us what they’ll pay, and that’s crucial.
We’ve heard the saying a million times: A thing is worth exactly what somebody will pay for it. Keep in mind, however, that our customers will tell us the minimum they’re willing to pay (whether they’ll admit it’s the minimum or not).
I don’t ever want to be the cheapest option. Ever. That’s a surefire recipe for failure as an entrepreneur. Most people associate the least expensive option with the lowest quality, whether that’s true or not. I’ve often found myself hesitating to choose the least expensive option, even if it’s just a bottle of water at a gas station, because there’s got to be something wrong with it. I subconsciously gravitate toward the second-to-least expensive option for that psychological reason alone.
You know who doesn’t do this? The customer with zero stake in the quality of the product, the one who is making a decision strictly on price. If we’re the cheapest option, we will win their business every time. There’s only one problem: If we rely on these customers, we can’t raise our prices. Ever. The moment we do, we immediately lose a disproportionate segment of our customer base. It doesn’t matter if we triple the functionality of the product, because that’s not why our customers bought it. They bought it because it was cheap. Furthermore, those other customers who passed on us the first time? They’ll never shake that first impression of low quality.
Being expensive is a much easier problem to have, as long as we’re the premium option. And startups should be premium options. As a startup, we’re either adding necessary value that the incumbents and competition don’t, or we’re creating a market that didn’t exist before. If we’re not doing one of those things, we’ll never survive no matter the price.
Just because we’re not the cheapest option doesn’t mean we can’t appeal to price-conscious customers. We just have to lure them into the tent and level-up the importance they place on quality — from zero to anything more than zero. It’s simple math.
We can do this with discounting, a strategy that has exploded over the last few years. This means free Lyft rides, loyalty programs, or $5 off a customer’s first order. In a B2B sense, it’s a half-day of free consulting, a readiness evaluation, a low-feature free version, or 14-day free trial. Whatever the discount or promo, its purpose is to make us the cheapest option for a limited time — just long enough for the customer to understand why quality matters to us.
If we want to push customers toward a behavior that is better for our business, we discount that option.
Invariably, a first-time customer discount will attract non-price-conscious consumers as well — especially those who believe quality matters but don’t yet know why. It’s an opportunity to play on their gut feeling — their unspoken desire for quality — and they’ll appreciate getting a deal along the way. Again: This is only for a limited time. We can’t discount forever. Every time I go to one of those discount clothing stores, there’s always a red line through a higher price that I’m not paying. I know no one is paying that price. I just don’t care how long my socks last.
Discounting is also an opportunity to use price as a tool for growth and optimization. If we want to push customers toward a behavior that is better for our business, we discount that option. We do this at my current startup, Spiffy, an on-demand mobile vehicle care and maintenance company. We want to take care of vehicles in office parks, so we work with property managers to set up days for us to service multiple vehicles on-site. Then, we offer a discount for employees of that office park on that day. This saves us a bunch of time and money, which we pass back to the customer.
I’d rather buy something for more than I was offering, not less. When we bought our house, we knew we were getting a deal. The builder had gone into bankruptcy with two houses left unsold. The houses sat finished and empty for a year during the legal proceedings. We happened to be the first to see the houses after those proceedings. I made an offer that was about 5 percent below the asking price. They accepted in less than 30 minutes. We have this great house that we got for way less than it’s worth, but I’m still burned that I didn’t start with a lower offer.
Now, reverse that logic: I’d rather sell something for less than I was asking, not more. Because if I sell for more than I was asking, that means I was undervaluing my product. If my price is too high and the customer says no, I can always come down. If my price is too low and they say yes, I’ll never be able to ask for more.
On a broader scale, we must analyze our sales constantly — with each new feature, cycle, and set of customers. If we feel we can charge new customers more, it’s our obligation to raise our prices. Customers, in turn, will appreciate that we are valuing ourselves higher. On the flip side, if we’re watching those sales and we can’t get any traction, we can lower our prices. Whatever we do, let’s allow the market to make that correction for us — let’s not do it to ourselves.