Pricing objectives for startups
Every entrepreneur needs to recognize that setting a price is not a “one-and-done” exercise. Pricing must and should be revisited frequently because of a variety of changing factors, such as the addition of new channels, product improvements, increased brand equity or a change in target markets. One critical yet overlooked reason to revisit pricing is the role it plays in the overall business-building process. Startups go through several distinct stages in the process of becoming businesses. It’s important to recognize that pricing supports a different objective at each stage.
- Early stage: The business objective in the early stages (discovery and validation) is to find product–market fit. At this stage, the purpose of your pricing approach is to find the balance between price and product value (more about value below). Most entrepreneurs will tell you they feel euphoric at their first sale; the mere act of someone deciding to pay for your product is one of the most powerful experiences a founder can have. It’s also a hugely effective feedback mechanism: “They looked at my product and decided it was worthwhile!” And that’s exactly the feedback that is valuable at this stage. Getting to this point involves hard work and systematic experimentation.
- Growth stage: At the growth stage, you know you have a valuable product, so the business focus has shifted to thinking about scaling—specifically around building a repeatable and scalable customer acquisition model. From a pricing perspective, you are now interested in finding the price point and pricing model that optimize volume and customer profitability. Even at this stage, that means a fair degree of experimentation, but the key to growth is finding the alignment between how your customers make money and how your product delivers value to them (or how they extract value from your product). For instance, if you make tax calculation software, whether for consumers or corporations, it will be typically used only once per year, which makes a monthly subscription model a poor fit for users. However, if you add functionality, like bill payments or portfolio management, the software becomes something users can benefit from year-round, and a subscription model might work.
- Scaling stage: At the scaling stage, you’ve established your growth model and the business objective has shifted to expansion, either into new market segments or geographical markets. While each market you enter will require the same kind of experimentation and learning as described in the previous two points, it has to be done with one other objective in mind: protecting against disruptions from lower-cost competition. Aside from having a healthy dose of paranoia when considering market conditions, such protection against future disruption, this is best achieved by being very disciplined and not adding too much cost to your product.
Actions
- Ensure your pricing approach supports the overall business objective of the stage your startup is in.
- Involve the relevant internal stakeholders—founders, product, marketing—in determining pricing objectives to make sure everyone is aligned.
Jon E. Worren