One of the most difficult problems is pricing for hitech startups. Your initial business plan should address pricing. There are “rules of thumb” for pricing for early stage startups. But, do not count on them providing a great solution. After all, you are doing something different.
Your success in developing a good pricing strategy will be a Key Success Factor for your startup.
If your product is creating a new market then there are no real competitive offerings to look at for pricing comparisons. Further pricing trends may move rapidly. Be sure that you are tracking pricing to understand when and how to change your price.
Factors that impact how you set your price:
Your pricing plan will evolve:
- The first few customers will receive great deals just to achieve a couple paying customers
- Then there will be several pricing experiments
- As MVP and pricing and repeatable sales cycles become known the pricing will evolve to match a plan by which the startup becomes profitable. Achieving this stage involves a trade-off between market demand desire for faster payback
- Further impacts come from changes to the offering, its positioning and external market variables
- Initially, pricing will need to be reviewed several times per year
Pricing can be established using:
Startups can sell their product on a cost plus percentage basis; perhaps cost plus 50%. But, this is only a good idea when you are selling a commodity. May I suggest that you should never sell a commodity unless you have some compelling advantage?
- Competitive prices
Many startups set prices based on the prices of their competitors. This is a “safe” approach to use. I suggest that after you have some customers and really understand your MVP, that you consider migrating to a value based pricing model.
This is probably not your (real) initial pricing strategy as a startup. I recommend that you try to migrate to a value based pricing model. This is where you price based on value received by the buyer. This might be a measure of increased productivity. Please research what your prospects and customers perceive as the components of value. Do your product quality and brand align with your price point? Then you can work to increase the value perceived by the customer. Understand the useful life-cycle of your product.
- Seasonal factors
For some offerings there are important seasonal factors that cause the pricing to vary over time.
Pricing as a positioning tool
Your price can convey an image of premium luxury; mid range; or inexpensive quality as a part of your marketing messages
- So you might price below competitors to achieve early sales. But, way too many startups price too low. Some go out of business because they cannot project a payback that attracts investors; or just cannot cover their “burn rate”. Never sell based on being the lowest price product.
- You might price near your competitors and then set your offering apart by stressing features or value-added
- You might charge a premium price and move to establish your product as the best. This can be a winning strategy in many business sectors/cultures (not all). But, higher price points imply longer sales cycles, more skilled (expensive) traveling sales staff and harder-to-predict sales forecasts.
Your collateral will include brochures (in some cases), website content and messages, press releases, case studies, testimonials, sales presentations, etc. The included messages must be coordinated with your positioning and pricing model.
Contract length can be a pricing tool
- Some SAAS startups use monthly pricing to encourage easy customer closes. Most convert to annual or longer contracts to achieve upfront payment, reduce customer churn and stabilize revenue.
- You can decrease price for longer term commitments
Understand your market demand environment
After you understand the following you can review your pricing strategy and adjust your pricing strategy in alignment with your market strategy and business plan.
- Your customers
- Margin enjoyed by your customers – The larger the margin that your customer (sector) is experiencing; the more they can afford to pay for your wonderful new product
- Over time your ability to increase margin will depend on your ability to align pricing with product benefits, marketing messages, branding, and sales skills
- Do a complete competitive analysis on your five most significant competitors.
- How price sensitive are the customers of each competitor.
- How can you differentiate your offering?
- What value added services do they offer? IBM is the King of value added services.
- How can you differentiate your offering?
- Ceiling Price
- For some sectors there is a known “Ceiling Price”, the highest price that the sector will pay for a particular offering. Understanding it can be a useful reference
- Price Elasticity
- For a sector where there is less price elasticity for your offering you can raise the price for a good quality product. This is easiest with few (good) competitors and buyers who are not price sensitive. It is harder during periods of economic adversity
- Price Wars
- As a startup you want to add value and position your products to avoid participation in price wars.
- When asked about price by a prospect; do not dance defensively until the prospect loses interest.
- Never sell based on being the lowest price product.
- You must overcome the issue of pricing for hitech startups. Do evolve to setting your price as an impactful weapon that relates to your product value as perceived by your customers
- Pricing Strategies for Small Business
- Tomasz Tunguz venture capitalist at Redpoint The 7 Factors to Consider When Pricing Your Startup’s Product
- How to Sell at Margins Higher Than Your Competitors : Winning Every Sale at Full Price, Rate, or Fee by Lawrence L. Steinmetz