An Entrepreneur’s Guide to Startup Pricing Strategies

An Entrepreneur's Guide to Startup Pricing Strategies thumbnail

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Far too often, startups treat pricing as an afterthought. If their company fails to achieve its sales targets, founders rarely blame pricing. They see fault in the product or service they feel is inadequate.

When a price is not working, the most common solution is to lower it without considering other factors. Instead of lowering the price arbitrarily, founders should consider how it can be better matched to customer value.

As an entrepreneur you must understand pricing the various methods startups can use, and how to choose the best route. Here’s your guide.

Related: 10 Pricing Strategies That Can Drastically Improve Sales

The importance of pricing

Let’s first discuss the process of price determination and why it matters.

  • Costs have an impact on the price . Price is the markup that is applied to a set inputs. It makes sense when viewed through this lens. It is impossible to run a business if you have too many costs. Therefore, it is important to find ways to reduce costs and set a price that is more than the costs.
  • Consumers determine price. On the other hand, there exists a certain equilibrium with pricing. If you set your price outside of the range customers are willing to pay, nobody will buy what you sell. The market is the main factor that influences price. It is possible that the willingness to pay may not be clear. This should prompt you, as a founder, to analyze the competition and get feedback directly from consumers.
  • Prices set expectations. Pricing conveys information on a psychological level. Price is not only a sign of quantity and demand but also a sign that the product is of high quality. The new iPhone may be cheaper to make than Apple’s, but customers will pay more for the best smartphone on the market.
  • Prices affect cash flow. From an operational standpoint, cash flow is derived from both price and sales. Your pricing will affect the expected sales. Pricing strategically can help you maximize cash flow and avoid costly ways to raise capital such as dealing directly with investors or borrowing money.

Related: The Price Is Right: How to Price Your Product for Long-Term Success

4 common pricing strategies

As founder, pricing is a way to grow your startup. Pricing can be used to achieve different goals depending on the route you choose.

Let’s now look at four approaches to pricing.

  1. Penetrate the market.
    If your sector is currently dominated by existing players, charging lower prices initially and subsequently raising them is a viable option to establish a name for yourself. Although you may lose some of your market share, it will be offset by the increased revenue you generate. Slack, for example, used this strategy to gain widespread brand exposure in the market for communication tools. After establishing a solid reputation, they were able to charge much more profitably and have continued their success.
  2. Charge a premium.
    In contrast to a penetration strategy, you can price a product or service higher than the norm of a respective market, thereby positioning yourself as a premium brand. This strategy is often difficult for startups in the early stages, but can be extremely valuable if you are in the right market. Salesforce’s “unlimited” subscription plan is a prime example. Premium pricing is a great combination with a free trial. Prospects can easily see how different the product or service are from other products and services.
  3. Maximize price .
    Similar to charging a premium, startups that employ a maximization strategy will seek to levy the highest price consumers are willing to pay. This strategy is best when there is little competition in a market. It allows new entrants to capitalize upon unmet demand. This strategy becomes more difficult to keep up with as the market develops. New players will likely offer similar offerings at lower prices, which is why there are so many of them. It’s unlikely that your startup is a premium brand with status. If so, it will be difficult to justify higher prices.
  4. Skim to the top.
    While starting low and moving higher in price may work, as in a penetration strategy, startups always run the risk of losing customers at an elevated cost. Skimming is a good strategy. It involves gradually decreasing the price over time. Customers are used to seeing a drop in the price of products and services they are interested in. If the novelty wears off, you can reduce the price to keep your startup afloat in the market.

Related: 5 Strategies of ‘Psychological Pricing’

4 tips for choosing a pricing strategy

Now that we have an understanding of the importance and various strategies, let’s talk about how to make the right pricing decisions.

  1. Define your objectives.
    Consider whether the price you set today is driving a short-term gain at the expense of long-term success. If you underprice your product or service, it could result in a surge of unrequested customers. This can be detrimental to your business if you rely on repeat customers.
  2. Conduct market research.
    When breaking into an established market, it is always recommended that you analyze what prospects are paying for similar offerings. Reach out to potential customers and determine their willingness to pay for your product. Then, map out the existing landscape of competition along with their prices.
  3. Evaluate your unique selling proposition.
    If a product or service provides immense value that no one else is able to offer, customers will be willing to pay above market rate to reap the benefits. It is important to determine if your product or service’s price is fair compared to its perceived value.
  4. A/B engagement test prices.
    As with many different aspects of an early startup, experimentation is often key. Engagement is a useful indicator of what price is most appealing to a consumer. It is possible to offer the same product or service at different prices to different customers. This helps you identify what works best.

In the end, price is more that a number. It is a key factor in many other decisions. These tips will help guide you in choosing the best pricing strategy for your startup to maximize its growth potential.

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