How AI startups should think about pricing their products
Pricing. The topic that’s inspired countless blog posts and X (or Twitter, whatever) debates.
It’s a problem literally as old as business itself: How much do you charge for your goods and/or services? Too much, and customers will balk; too little, and you may inadvertently devalue your product or even jeopardize your company’s financial viability. That issue is magnified for startup founders when talking about things like software as a service (SaaS) or, more recently, AI.
There isn’t much consensus on this problem, either. If you’ve spent any time at all browsing through the heaven-forsaken labyrinth of “thought leadership” on this subject, you’re probably wondering why so many “experts” spend their time saying blatantly contradictory things. Well, that’s pricing in action, my friends! Despite what you’ve heard from your friendly neighborhood SaaS influencer, pricing is fundamentally about human psychology.
Consider the psychological warfare behind SaaS pricing models. Here, the battleground is tiered pricing, where every package promises more features, more data, more “AI-driven insights.” Your mission? Seduce enterprises into scaling up from the “Basic” tier to that all-inclusive “Ultra-Premium” like it’s an all-you-can-eat buffet of software and AI. Not unlike James Bond, most founders would be better off thinking through pricing strategy in terms of fundamental human behavior rather than trying to understand reality through a tortured pricing framework. The question here is not “cost-based vs value-based,” but rather “what are the incentives of the buyer (i.e. the individual decision-maker) both today and tomorrow?”
And let’s not forget the ever-watchful eyes of your competitors, ready to undercut your pricing — or worse, fork your curated open-source repo into a freemium Frankenstein of your life’s work. This competitive dynamic, by the way, is why blindly applying pricing frameworks does not work well. Yes, it would be wonderful if you could quantify the value you bring to your customers and price accordingly. But even if you could, it would still only work if you exist in a vacuum. If you operate in a market where all players are underpricing (I’m looking at you, AI startup founders), then you have no choice but to adapt to that reality.
Pricing is hard, especially for AI startups; we can all agree on this. That said, there are some obvious pitfalls you should avoid. If you’re building an AI copilot and your whole value proposition is about increasing efficiency, I would suggest steering away from seat-based pricing. Generally, complexity in pricing is bad and value-based pricing is good. Overpricing is usually worse than underpricing, and founders should beware of over-reliance on discounts to grow accounts. Yes, of course, there are a few general rules of thumb to help you avoid fatal mistakes.
Having aired my cynical thoughts, here are three constructive recommendations to AI startup founders (indeed, any founders) when thinking through how to price your product:
- Remember the fishing tackle: Never forget who the real buyer is, and often it’s not your end user. My favorite story from Charlie Munger is one he tells about a guy who sold fishing tackle. Charlie asked him, “my God, they’re purple and green. Do fish really take these lures?” The dealer replied, “Mister, I don’t sell to fish.”
- Keep it super simple (at first): This is especially relevant for AI startup founders. Pricing should lower your customer acquisition cost! In the beginning, you’re looking for early adopters — those willing to put up with a few hiccups because they so value the potential benefits you deliver to them. Make it super easy for them to try your product, blow them away with delightful experiences, and then optimize monetization once the fast followers start showing up.
- Value generated does not equal value captured: This is such an obvious concept, but, of course, one that is often ignored during times of rapid innovation and cheap capital. To quote Munger again, “there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that’s still going to be lousy. The money still won’t come to you. All of the advantages from great improvements are going to flow through to the customers.” The good news is that creative pricing, to some extent, can aid you in capturing value.
When crafting your AI startup’s pricing strategy, remember that at its core, pricing is about understanding human behavior and psychology. Instead of getting lost in rigid business frameworks, focus on the motivations and decision-making processes of your actual buyers — that’s where you’ll find the key to pricing that truly resonates and drives growth.
If you are a founder struggling with pricing questions or just like to nerd out about pricing strategy, feel free to reach out to me on X, on LinkedIn, or via email.
