This next part of the #gxmxp Series is all about developing the right price for your product/service. As you bring something new to market, setting your price can be a tricky process that if handled poorly can completely stall revenue growth.
There is no getting around the fact that pricing is important and it’s hard!
Few people explain the challenge better than Michael Dearing who ran pricing at eBay. Here’s a key insight from Michael:
Most people think that pricing is a Rubik’s cube with an answer, and it’s not. It’s actually a judgment problem. (Michael Dearing)
According to Forbes, 50% of startups underprice, while another 20% overprice their value. Startups struggle with pricing for two reasons:
Okay, at this point you know the drill: scroll over (or down on mobile) to the Resources / Downloads area and grab the Business Pricing Model worksheet. Select your ICP to apply your learnings and complete the worksheet.
The biggest roadblock to getting pricing right is not starting with a pricing hypothesis. Yes, you want to retain pricing flexibility. But, you must be prepared enough to at least provide a ballpark outline of your pricing.
Learning vs Revenue
While you’re working through this phase, think about scale vs. stage relevant pricing. Do you need revenue for learning or for scale? If it’s for learning, then price in a way that lets you learn something about a new customer and your market (without losing money). If you’re pricing for scale, you have to price in a way that allows you to take on more business.
If you are pricing to learn you should not jump to cutting your price as low as possible. In fact, discounting what your product costs often reduces the perceived value of your product.
At the early stages, you should be approaching every business opportunity as a mutually beneficial partnership. Your customers are going to be less willing to provide feedback and insights to improve your product (and their outcomes) if they have very little skin in the game.
Another mistake that startups make is pricing products the same way that major companies in the industry are doing it, without thinking about those companies’ overheads and advantages. Instead, focus on the pricing structure (like a subscription or annual fee) of products in the market.
You want to price and sell things the way people are used to buying them. Don’t create extra friction by being the only company selling a product in an entirely different pricing structure.
Customer-Centric and Value-Based Pricing
The way we’ll develop pricing here is through a customer-based approach. Instead of focusing on your cost to deliver goods, you’ll want to reverse engineer the value that your product creates.
If you find that the value you create does not cover your cost to deliver, then that might be a sign you have an ICP mismatch.
To determine your product value, start by focusing on the specific problem that you are solving. What does it cost your customer to do their job the way they are doing it today?
Be sure to go beyond the problem itself and focus on impact. For example, if your product automates a manual process that normally takes someone two hours every day, is there an opportunity cost from higher value jobs that are not getting done? What is the impact of those higher value jobs not getting enough time?
Strive to understand the impact on your customer to understand what the problem is costing them. If you remove the problem, then you remove the impact. From here, you can develop a reasonable price for that value. Once we know that, we can develop our pricing hypothesis.
Business Pricing Model Exercise
The first part of the exercise will be about reviewing your current pricing structure. Under section one of your Business Pricing Model worksheet, write out how you set prices today and what your pricing structure is (subscription, annual, set-up fee, etc.).
Then think about your free trials or pilots (if you have them). Is there a way for someone to get started without fully committing and what does that trial pricing structure look like? For the number of locations/users question, is there a model here where pricing changes based on the number of locations or users you have?
Then, document whether you have any bundles or tiered pricing and if there are any discounts customers can take advantage of.
In the next part of the Business Pricing Model worksheet, you’ll describe how you arrived at your current pricing structure. List the pricing models you’ve tried before and think about what worked and what didn’t.
Then, detail the feedback you’ve received about your pricing. Don’t just look at deals won, but think about your entire pipeline. Where did deals stall and don’t forget to look at where you might have underpriced. You might’ve had some interesting market feedback from a few months ago that you should revisit.
Next list how your customers like to buy this product and how your competitors price. If you don’t know, research their pricing. If it’s not on their website, try to find it on industry forums. It also doesn’t hurt to do a couple of competitor demos (we’ll talk about this more in the next post, so be sure to sign-up for the #gxmxp Series newsletter to be notified).
Finally, describe your current cost structure. What are your costs for each product? What are your fixed costs? Fixed costs might be things like booting up a new server or manufacturing another widget. What are your variable costs? That could be something like having to boot up multiple servers on demand. Then, document your gross margins.
Now it’s time to come up with your new pricing hypothesis. You’ll answer the same questions you did in section one above, but your answers will reflect your new hypothesis.
Similar to the customer journey mapping exercise we completed together last week, you’re looking at everything you’re doing today and identifying obvious friction points.
This will lead to a new pricing model for your ICP that you can start using.
Test ⇒ Measure ⇒ Learn
The first rule of thumb for pricing is simple: pick a price and put it out there for feedback. Your first pricing hypothesis is not likely to be the one you scale revenue with but rather the one you scale feedback with.
A good way to know if your new pricing is too low or high is to look at your sales. If you’re winning 100% of your deals and pricing is never coming up, there’s a good chance you’re priced too low.
Similarly, the opposite is true. If several people are telling you that price is an issue and you’re losing every deal, reevaluate your pricing. Is it the structure? Or is it the actual cost itself?
Beware of discounting your prices too much or too quickly. In most cases, sales friction is not created by cost but by perceived value.
Don’t react to every objection thinking that price is the issue and that you must discount in order to win business. More often than not, the business can be won simply by going back to the problem that you are solving and gaining agreement on the value being created.
At the end of the day, the market is going to decide the price of your product. Your goal is to be in the ballpark of what the market is looking for so you can name an actual price when potential customers want to talk cost.
If you can’t name an exact price because your pricing is situation-specific and you need input from the customer, build a framework that enables your customer to quickly give you the info you need.
Customers typically do not object to pricing that’s specific to them, but you need to make that as easy as possible. It shouldn’t take weeks or require a lot of effort on the customer’s part.
Pricing Flexibility as an Early Competitive Advantage
Whatever price you set during this phase should remain flexible. Your competitive advantage at the moment is that you don’t have to publicize pricing on your website or any content. This means you can keep it private and as you learn more about your business, you can change it.
When you start testing your new hypothesis, it’s also important to make sure you’re not quoting customers wildly different prices. The last thing you want is people in your industry discovering that one company got a certain price and another company got a much higher price.
While you spent a little time here looking at how your competitors price their products, we’re going to dive deeper into your competitors’ businesses in our next blog about conducting a competitive analysis. That’s up next in our #gxmxp Series!
We highly recommend Michael Dearing’s pricing insights video available from HeavyBit. Click here to check it out.