Value based pricing! Pricing is a hard task – particularly in a startup that has no precedence, you’ll need to come up with a level of pricing. The easiest thing to do is to compare with equivalent players in the market and price your product at a similar range. However, when you decide the price of your product, keep in mind the perception of value that you want to convey to the customer. This is very important because it helps you choose the type of competitor and price yourself in a similar range. For instance, if you are a luxury product, you can’t price yourself at a cheap segment and vice versa.
I’m sure you already know the complexity involved in creating a pricing strategy for a startup. In this article, we will talk about some of the strategies you can follow for pricing your product as a startup. Most commonly, we talk about cost-based pricing vs market pricing.
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What is an ideal pricing strategy for a startup?
The answer is Value Based Pricing!
The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself.” — Peter Drucker
The most common debates are around cost based pricing and market based pricing. I’d happily steer toward a value based pricing approach because it gives you the most conducive conversation with customers and investors alike. It moves you away from cost based conversations which are the most challenging ones to win against. You’re almost always caught in the backfoot in a cost based conversation.
The Problem with Cost-Based Pricing for Startups
I find the cost-based pricing model rather difficult as a startup. The theory behind the cost-based pricing model is to add up the costs in the product development/service delivery process. This is increasingly difficult in a startup because it is hard to identify your optimal costs until you reach a certain stability. While dealing with such uncertainty, if you restrict yourself to the cost based pricing, the chances of success also reduce drastically.
Using Value Based Pricing for startups
This is perhaps the most effective pricing model you can use for a startup. Instead of having to worry about costs or the willingness to pay, you can focus on the value, time saving and the outcome that you are providing the customer. You will never escape the willingness to pay conversation because it shows what the market is ready for.
But the value based approach atleast gives you a good pricing strategy for the startup approach.
Managing price changes
The moment we realise that the customer is not ready to pay the suggested price – the agile manifesto or the continuous improvement process demands that we reflect and identify if there are to be any changes made in product/service pricing.
The price changes are often reflected through discounts and price cuts. Although price cuts are usually heard of in the startup world, the concept of price increases is often not dealt with by welcoming hands.
I have always been on the side which grumbles whenever there is a price increase for the same products I use.
The bottomline however is – if you increase the price of a product
- Be prepared to explain the added value for the change
- Convey the factors leading to increased prices
Price cuts however don’t have an easy answer. It is very hard to say, “Since you did not buy, I have to reduce the price”. As a customer, my response to the above would be that the company was trying to treat me as a fool.