If you are an early-stage startup and heard any of the following objections from your potential customers “We do not buy from startups”, “We do not want to pay money since you are a startup”, “Your prices are too high”, then most likely you are selling to the wrong people. The best thing to do then is to leave the conversation rather than negotiate.
‘If you are reaching out to the wrong people, no matter how good your service or product is, your sales will fail’
During my interactions with 100+ startups over the last couple of years as a mentor, questions regarding pricing are at the top. Finding the right price is not easy, but it all starts with identifying the right group of people for your product.
Identify the right customers for your startup
“The riskiest thing one can do is to build an average thing for average people and pitch it to masses.” — Seth Godin
In the age of social media and influencers, we all are too focused on getting hundred’s of thousands of likes. One of the most common metrics we use — “my video got 1M likes”, or “my ProductHunt launch got 1000 upvotes”. But does it really matter? Most, if not all, people who ‘liked’ something will forget it in a couple of minutes and move on.
Focus on shares, and comments and ignore the likes
There are many ways to find the people who really care about what you are doing (a.k.a early adopters and innovators). There is one common behavior among them — they will share with others what you are doing.
For example, When I write an article, I do not care much about likes. I am more focused on people who shared my article and what they wrote while sharing. Let’s take the example of two articles, I wrote — One got 150+ likes and 27 shares, while the other 106 likes but 33 shares. If I have to define which one people love more, I will take the one with more shares. I also make sure to follow up with each of the people who shared the article individually.
Another metric I use as a speaker is the number of people who connect with me via LinkedIn after my talk. So if you are speaking at an event (or startup competition) about your product, do not worry if you won first prize or not (I think judging and ranking early-stage startups at competitions make no sense). See how many people came up to you to talk about what you are doing or connected with you afterward. These are your innovators and early adopters. Engage with them and nurture them. Do remember, you do not have to make everyone love your product, even if 0.01% in this world love what you do — you have a successful business.
“Build something that 100 people love, not something that 1 million people kind of like” — Paul Graham
But shouldn’t we go after big audiences?
I find one of the most common questions to early-stage startups “How big is your market”, an irrelevant one. It makes no sense to ask that question. If that question was asked to Airbnb, Facebook, Google or Twitter when they started, none of them would have correctly predicted or even guessed how big their market is or will be. In fact, I will say, smaller the audience the better it is. Focus on those small segments and make them love your product. At an early stage, it is better to be a whale in the pond, rather than a small fish in the sea.
Illustrating with an example, a startup I am mentoring is building a marketplace for the tattoo artist. They spent a lot of money and effort to go to Germany (one of the biggest markets for tattoo artist) and onboard 100s of artists from there. But despite that effort, all the booking they were getting via their website were only from one country (the same country where the startup was based-although a smaller market). They would have spent a lot less money and perhaps got more bookings had they initially focused in their country and then scaled later on.
Don't price by competition or cost
Once you have identified the early adopters or innovators, the next challenge is to nail down the appropriate price for them. To do so, understand the value the product or service is creating.
Understand the motivations and value you are creating for your customers
Some buy for security, some buy for status, some buy to solve a problem, and some buy if it’s cheap. Depending on what you sell, once you understand the motivations of your customers, you can price it accordingly.
1. Just a price game
Alan Sugar, the founder of Amstrad, once said “I never set down to Roles Royce kind of products, the products I sold were for truck drivers and their wives. Pile it high and sell it cheap. It was all sold on price specification”.
You can do the same too, often this is suitable if you are doing some process innovation, not product innovation. There are already other similar products on the market, and you are just providing a cheaper option.
2. Selling emotions
You can also be in the business of selling dreams or emotions — something like Gucci, Rolls Royce, Ferarri etc does. If you make someone feel good, or precious, then people are willing to pay quite a lot. However, this is more of a branding game, and very few startups are able to play that game (as it’s expensive). If you do manage, the sky is the limit w.r.t. pricing!
3. Innovative products creating Value
Most startups I interact with are in this segment. It is difficult to price as there are not many benchmark or reference points. Instead, startups end up pricing by a factor of their cost or relative to their indirect competitors. Instead, I will recommend pricing by Value created. Create a benchmark and quantify the benchmark for use of your product — can be time saved, or reduced stress, or money saved or something else. Then equate the benchmark with a $ figure. A note: Once you know the quantifiable metrics you can use the same metric to have a price per country.
Shall I give for free my product to initial customers?
I often hear this question. I think sometimes startups have to give their product for free to get initial traction. That makes sense but it is very important that you make it clear to your customers “this product is priced $x and I will give for free to you but if you do like the product, can you do me a favor”. Bottom line, do not give anything just for free. People, unfortunately, do not value what they get for free. For example, I gave some selected people free copies of my book but in return, I asked them to review it in LinkedIn (as to give reviews in Amazon one has to be a trusted buyer).
Structure your pricing model
Once you have done some initial ad-hoc sales with early adopters, it’s time to structure your pricing model. I was having a conversation with a hardware startup who made some initial sales but was struggling with the question of fixing the price for future customers. If you are also in that stage, my recommendation is to answer the following three questions.
- Who are your best early customers
- What price they paid or willing to pay
- What Value they attach to your product
Focus on your say top 5 ‘best early adopters’. The answers to the above questions will help you to structure the pricing model and focus on the right potential customers. Not everyone will be or should be your customers, but it is important to sell to the right customers for the right price.
I hope you found this article a useful read. This is more of an introductory article on the subject, but I wrote this as I keep on hearing the same questions over and over again.