The Price is… Right?
/Product pricing is the most critical and painstaking portion of running a start-up. It may sound easy but mismatched pricing strategies have resulted in businesses leaving millions of dollars a year on the table. Optimizing a pricing strategy for industry, competition and the target market can make or break a new business. Pricing, for the most part, can be aligned with one of three business objectives:
Revenue Growth
Market Share
Profit Maximization
Below are a few aspects every start-up needs to consider while designing the ideal pricing structure to master this powerful revenue management tool during the quest for growth.
Basic Structure
Determining a price structure largely depends on the framework of a business. Pricing can be influenced by adopting either a cost-plus model, essentially a percentage mark-up after considering production costs; or a value-based model, where product pricing is based on the perceived value of the product in the eyes of the customer. The latter provides a team with a much clearer picture on the market’s willingness to pay, allowing businesses to maximize revenue inflow.
Value Metrics
After establishing a skeletal pricing structure, teams need to determine the product’s value metrics. Essentially, value metrics are what and how prices are based on. Businesses need to align their value metrics with the needs of their customers and simplify the metrics, making them intuitive to the customer. A few examples of value metrics can be:
Flat per user/ team/ department fee
Pay per use/ pay as you go model
Pricing frequency – weekly/ monthly/ annual
ROI based variable pricing
Value metrics that have been correctly identified scale with the customer, increasing MRR along the way.
Pricing Tiers
Tiers allow businesses to segment pricing based on the needs of specific target markets. Customer data helps identify features offering the most value to the customer. This information enables teams to construct pricing tiers with the most sought after features and design add-ons that maximize revenues. Tiers allow business to identify the tolerance for pain level in the customers, with clients opting for the tier offering least resistance (price-wise) and then scaling up consumption over time.
The following example, from the Economist subscription page, highlights the potential power of tiered pricing:
Digital Subscription: US$ 59
Print Subscription: US$ 125
Digital + Print Subscription: US$ 125
Option 2, the Print subscription, seems to be utterly redundant. Why pay only for print when the digital AND print subscription is priced the same? Here’s the kicker: Option 2 converts customers from ‘deal-hunters’ to ‘value-seekers’ – resulting in customers selecting Option 3. Without the middle tier, the difference between the Option 1 and Option 3 would results in subscribers opting for the lower price. Also known as Decoy Pricing, this example is always helpful to keep in mind while designing pricing tiers.
Measure Value
Determine the willingness to pay by identifying the value that customers will derive from the product. A simple method of quantifying the value provided is by approaching the question from one of two perspectives: Revenue Enhancing or Cost Saving.
Will pricing be a percentage of saved costs or additional revenue? What is the value of the product’s value-add to the customer? How much of a discount from the value-add should the product be priced at? Follow the 10x rule to be able to measure value most accurately – if the product is priced at $10, it should provide customers $100 in value.
There are situations where the value-add is intangible, making quantifying the value slightly problematic. It is in these situations that teams should consider switched to a cost-based or competition-based pricing strategies.
Competitive Positioning
Lastly (but not the least), start-ups need to account for the pricing of their competitors. Teams should identify and base their pricing model on the value provided by a competitive solution. This is helpful is identifying where not only the product is positioned in the market but also the product’s pricing. A pricing model needs to reflective of a product’s relative position in a market based on value provided, perceived value and differentiation.
After considering the above factors while defining price points, start-ups can explore various customer acquisition tactics such as:
Freemium Model
Discounts
Non-Monetary Benefits
Price Protection
Product Bundling
Price Charming
High-Low Pricing
Price Anchoring
It is challenging to ascertain which tactics are best aligned with success in specific industries, with each being distinctive in their own way. Pricing needs to be determined according to characteristics that are unique to individual businesses and objectives.