Here are four common pricing mistakes we’ve seen startups make:
Pricing too low—which can add up to a lot of missed revenue
Charging the wrong way, e.g., charging per seat when what your users want to pay for is something else entirely
Guessing on pricing. An
analysis from Openview found that over 40% of seed-stage startups have never tested their pricing or conducted willingness-to-pay market research.
Leaving pricing until the last minute. In the Openview analysis, half of startups considered pricing only in the immediate leadup to launch, not sooner.
You can avoid those mistakes by taking a strategic approach to pricing. It doesn’t have to be—and truly shouldn’t be—a last-minute guessing game. Instead, your pricing should be as well-researched and well-planned as your other fits.
A strategic approach to pricing entails determining, early in your startup’s life:
What to charge for. We call this your value metric. Sometimes it’s obvious (an umbrella shop charges per umbrella), and sometimes it’s much trickier to pin down, as we’ll get into.
How to charge. We’ll discuss five pricing structures: usage-based, tiered, flat-rate, per-user, and variable.
How much to charge. And we’ll go over the three main methods for setting your price: value-based, cost-plus, and competitor-based pricing.
Before we dive in, there are two essential points to consider as you prepare and launch your pricing strategy:
Your pricing isn’t set in stone. It should evolve as your business does, and as you collect more data and insights.
Your customers aren’t just making the buying decisions. Their input should also inform your pricing decisions.
Of course, it affects the business side of things: your revenue, the expenses you can afford, how many conversions you get, how many customers you retain.
It affects your market share and brand perception—for instance, pricing too low can devalue your product in your audience’s eyes.
And it directly affects the durability of your startup.
Yes, it’s important to get it right. But don’t sweat it. For two reasons:
One, your pricing doesn’t have to be perfect. It just has to be in the right range.
And two, pricing isn’t fixed. You can always revisit and revise your pricing strategy. We recommend assessing your pricing every three months to see what’s working and where there are opportunities for improvement. As you revisit and revise, your price will get closer to perfect.
For now, we’ll get you to a solid initial pricing strategy.
The third mistake we mentioned earlier is “guessing on pricing.” To avoid that mistake, it’s important to engage your customers in the pricing-strategy process.
Here’s how Tyler Gaffney, the CEO of ZenHub,
put it: “People get caught up behind the computer screen trying to figure pricing out, or doing a ton of benchmarking and research. ==Instead, they should be having conversations. All the answers are in your customers’ heads.==”
As you’ll see, the project for this module involves putting together a plan for how to get those answers. What that means is either talking to your customers or surveying them. By the end of this module, you’ll have a survey or interview template ready to use.
Surveying or interviewing customers is a critical step in building a pricing strategy that should not be skipped. It doesn’t matter how well you think you know your audience. True customer insights can only come directly from them.
The first pricing insight to gather is what your value metric should be.