Did you know that 72% of startup scaling issues arise from pricing too low or too high? (source: Forbes)
According to Harvard Business Review, a mere 1% price increase can lead to an 11% increase in profit. Highlighting the profound impact of quality pricing decisions.
We all know business 101: price is determined by market demand and vendor supply. But this only works when you have the data from long-term market engagement.
So where do you start?
Unfortunately, there's no magical formula to determine the perfect price for your startup product. The key is leveraging multiple indications and data sources to make an informed guess.
This blog will unpack 3 simple sources startups can use to create an accurate and high-performing pricing model from.
Factors Affecting Pricing Strategy
There are almost infinite elements that come into play when determining a successful pricing strategy for any market. Among these, for startups the main ones are:
Type of Market: Whether it's niche or mass-market affects demand elasticity and thereby, pricing.
Competitive Landscape: The number of alternatives and their pricing offers a reference point.
Buying Culture: Some market segments are bargain hunters, while others seek luxury and are willing to pay a premium.
Value Proposition: How does your solution alleviate pain points, and what is the perceived value of this relief?
3 simple pricing methods for startups
Let's explore three guiding pillars to anchor your pricing strategy:
1.) The Floor - Unit Cost: Begin with understanding your costs. If you're spending $20 per customer monthly, aiming for an 80-90% margin is wise, particularly for businesses with sizable fixed costs, like SaaS companies. Using this example, you'd be targeting at least $200 per month as your charge. These margins are attractive for investors, signalling potentially high profits at scale, and de-risk potential market fluctuations.
2.) The Midpoint - Competitors: Look at what customers are currently paying for similar solutions. If your price is on the higher end, ensure you articulate the unique and superior value you bring. Comparing with competitors often provides an excellent benchmark, and at the very least shows what your buyer is currently willing to pay.
3.) Ceiling - Measured Value: Quantifying the value you offer can set the upper limit for your pricing. If, for instance, your solution saves customers $20k monthly, they'll expect an ROI between 5x to 20x. Hence, pricing between $1k to $4k should offer a compelling ROI to motivate a switch to your product.
Industry Examples
When Slack entered the market, there were already established communication tools. However, they priced their product based on the enhanced collaboration and integration value they offered, placing themselves between free tools and high-end enterprise solutions.
Dropbox didn't just look at storage costs when pricing. They evaluated the pain of losing files and the value of easy access from anywhere, enabling them to price higher than basic storage providers but lower than enterprise solutions.
Zoom: Even before the pandemic-driven boom, Zoom priced its services by comparing with both basic video call tools and high-end teleconferencing solutions. They identified their value in terms of quality and ease of use and set their price accordingly.
Conclusion
Although '3 simple pricing methods for startups' might sound like the answer - There isn't a one-size-fits-all 'silver bullet' for product pricing. Many variables intertwine, making the process intricate. However, the quickest and most effective method to determine the right price is to start somewhere, engage your target market, gather feedback, and iterate.
If over 50% of potential customers balk at the price, you're either pricing too high or not effectively communicating your product's value. If 9/10 customers are saying yes without questions, you might be pricing too low.
Remember, pricing is both an art and a science. It requires constant attention, testing, and adjustment to find the sweet spot where value meets profitability.