You did the hard part: you developed a product to solve a real problem. Market research, the definition of personas, hours of product development, finding the perfect partners. On top of all of that, you still have to price your product. Yep, it’s hard. Pricing sounds easy, but hardly ever is.Pricing is the center of your business, especially because no specific department owns it.
Reason number 1: Startups overlook pricing
As an entrepreneur, you have plenty of decision-making ahead of you. And in the early years, most of those decisions will be about growth. Most startups spend a lot of time monitoring indicators to project growth.
But if you’re not Uber, growth cannot be your only focus. At some point, you have to start thinking about your bottom line and financial sustainability, so take a look at the example below:
In this amazing research, ProfitWell shows what is the impact on the bottom line if companies improve acquisition, retention or monetization by 1%. The results are astonishing: if you improve 1% on acquisition, you’ll have a positive impact of 3,32% on your bottom line; 6,71% on retention and an unbelievable 12,7% positive result if you improve 1% on your monetization model. It sounds counterintuitive, right? That’s why data is so relevant in decision-making.
Since startups usually don’t know monetization could have such an impact on their bottom line, they ended up focusing on acquisition or retention. But don’t worry, you’re not alone:
We have some initiatives to bring this subject to light, but there is a long way to go.
Reason number 2: Startups talk about pricing way later than they should
Pricing strategy and the revenue model are usually the last decision to be made before the business model is done. It is a small section on Canvas and a big question mark in any entrepreneur’s mind. It seems hard to innovate on such a sensitive matter, should we even try it?
As Madhavan Ramanujam brilliantly proposes in the book Monetizing Innovation, we should design the product around the price. Not only marketing and sales should get involved in the pricing strategy, but also the product development team. It is essential to align the limited resources — such as product development hours, for instance — to the features customer really value in the product. Pricing is strategic enough to be considered in the beginning of the business model definition.
Reason number 3: Startups focus on cost, not value
The cost-based strategy is still the most common and popular one, since it is easy to develop — cost is tangible — and safe — defining price based on cost guarantees the price will at least cover costs.
But there are two big disadvantages here: first, the customer doesn’t care about your costs; and second, if your costs increase — which is likely to happen — it will be difficult to increase your price at the same rate and speed.
That’s why the value-based strategy is a much better option. When you price value instead of cost, you are considering what the customer really wants. And how much they want to pay for what they are receiving.
Pricing is hardly ever ONLY about pricing. Think about it!
Larissa Sielichoff is a mentor and consultant in Pricing Strategy, holds an M.SC degree in Business and Innovation, and developed a pricing methodology focused on digital solutions based on her dissertation — Why Pricing Matters.