Too high, too low or just right?
Determining cost, value and appropriate placement of your product or service is an important part of any startup business. Many startup founders and entrepreneurs struggle with pricing, and it’s largely due to two completely opposite, but equally misguided ways of thinking. Like Goldilocks, some startups go too hot or too cold before they find a price that works just right.
Startup founders often suffer from low product self-esteem. The idea is that you are a newcomer to the industry so there is no possible way they can compete with the more established firms who are their competitors. For this reason, many choose to compete solely based upon price. The thinking goes that if you can just get people in the proverbial door, they will love your product and continue to pay for it.
The downfall to this way of thinking is that:
- It can cheapen the product to a point where customers are hesitant to even try it, thinking it must not be good if it is so inexpensive
- It is not typically an approach that ensures profitability or business growth. If Coca-Cola could generate outstanding profits by charging a dollar a can, they would. They can’t, so they don’t.
- It runs the risk of segmenting your customer base into two groups: those who are only here for the savings and those who actually like the product.
- Inevitably when you have to raise prices due to #2, you’ll lose a good chunk of the group from #3. Those Coca-Cola drinkers who became used to dollar cans won’t be happy when all of a sudden you ask them to pay 100x more.
The second misstep that many startup founders make is the overvaluation of their product. In many ways, startup founders are guilty of blindly loving their brainchild and falsely determining that because they think it is supremely valuable, it must be viewed the same way by others. With rare exception, this is typically not the case.
Overestimating the value of your product leads to:
- Difficulty penetrating the market. If you’re overcharging your competition, especially if it’s by a considerable margin, customers will be wary of giving you a try. Slow introduction leads to slow growth.
- High expectations of performance. This can be challenging if your product, high price tag and all, fails to live up to the varied expectations of a variety of customer preferences. The phrase “you get what you pay for” isn’t comforting to a customer who feels they’re paying a premium.
- Increased difficulty in moving up market. If you launch with a high price tag or one that is perceived as high, it will be difficult to raise prices later if needed.
- Difficulty in reducing prices if needed. If you shoot too high and find you have to come down considerably, customers will raise an eyebrow.
It’s a tightrope walk. Both mindsets can quickly throw up roadblocks to the supreme goal of any startup business growth.
Many factors will determine the price a customer is willing to pay for a product and an equal number of factors should dictate your pricing strategy. Deals, introductory rates or trial offers are a great way many tech startups introduce themselves. This strategy allows the customer to try out your product at a reduced rate and thus lowered risk, while leaving room to increase the cost to the customer after a period of time. Therefore, it makes your business idea work by covering the risk for your customer as well for yourself.
Early on, determine some basic fundamentals about your product. What does it cost to produce, manage, maintain, deliver etc are all early stage questions that should be known by the time you take your product to market. In addition, all startups should know:
- What you WANT to sell your product for. This is a realistic high limit. What would you love to get for your product?
- What you NEED to sell your product for. The is the realistic low limit. You can afford to get this without taking a loss.
- The answer of what to charge is likely somewhere in the middle of these two numbers and one that allows wiggle room on both sides to account for both an increase and decrease in price.
It is important that any introductory offer is built so that even the small amount of revenue generated does not result in a loss, but rather a loss leader. Likewise, leaving room to move up allows for incremental increases as needed without shocking the customer.
Like Goldilocks, it’s important to find that balance between too hot, too cold and just right.