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.
Is cost based pricing strategy valid for startups?
My immediate answer is NO because you will not have an indication of overall costs in a startup. This type of strategy works for companies that have an established supply chain and can predict costs reliably. As a startup, your costs can vary significantly until you find the right product market fit. Hence, it is a very dangerous strategy to think about pricing based on your costs. However, an indication of your costs will help you have good discussions with investors around topics of breakeven point, profit margin etc. It will also give an indication of the type of profit your product will anticipate to make at the event of success.
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. As a startup, the initial focus through the MVP or agile-based approach is to get the product out ASAP. If I extend the same logic to fast-moving consumer goods, this can be achieved via outsourcing to increase the speed to market and maintain operational flexibility.
How to arrive at the optimal price point?
Even through the above, if we arrive at a price point, an overarching question is – will the customer be willing to pay this for the service / product offered?
What to do if the customer is not willing to pay the suggested price? Add on points to consider are:
- As a startup, it is unlikely to get great deals on prices which economies of scale tend to get. The same applies to outsourced models as well.
- How do you balance the factor of discounts if you are looking into a fast moving consumer goods model? In addition, you will need to consider the holding/inventory costs if these goods don’t move fast enough.
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.
Is cost-based pricing the right model for you?
As you can see, there are multiple questions this cost-based pricing model throws up in the air. It is a strong strategic driver to have costs right. For this reason, most companies tend to take the market based approach
- It is easy and customer information acts as the driver so that you are never too far from the buyer
- You can respond swiftly and more flexibly with customer demands
- Availability of statistical information to know what a reasonable price can be
- Choice of comparing the startup with a high/mid or low tier to influence customer perception with pricing.
With the above in mind, as a startup founder, entreprenuer, my preference would be to go via the market based approach.
I can see quite a few challenges in the cost based approach, but I am also very curious about the approach people followed to make this model work.
Please do engage with your thoughts below, I am super excited to know what you think about “Is cost-based pricing valid for startups?
