bm|t newsletter Q3 2019
Setting the price of an entirely new offering can be quite complex and awakens associations with the classic game show, The Price is Right, where contestants, with little information, tried to guess the price of a product and inevitably exposed how subjective price/value perception is by giving such wide-ranging estimates.
The Price is Right
Startups can have very different goals and thought processes concerning pricing when initially trying to get traction in a market. Some startups might be so focused on gaining a foothold in a market and getting a critical mass of customer feedback that they are willing to give their solution away at first while others might be highly focused on cash burn and feel compelled to get to breakeven with their first customers.
While we are far from academic experts on the subject of pricing, and every situation is clearly unique, we decided to write down some of our thoughts and general guidelines that we hope will be useful:
- It is easier to lower price than to raise it. And price anchoring is an actual phenomenon. However, pivots can provide excellent opportunities to rethink pricing.
- Early customers are usually highly-interested in the solution and are often willing to fund further development, either as a separate charge (NRE/Installation fees) or in the form of higher prices in the early days of the rollout.
- Customization requests should be priced extremely high, especially if the degree of customization is so great that the customer-specific developments are difficult to transfer to future potential customers. One-time revenue opportunities are often more distraction than they are worth, especially when factoring in opportunity costs – which are often overlooked.
- If the solution/technology is truly unique, it should not be necessary to employ low pricing as the means to win customers. The extra time spent looking for first customers who truly value the offering is well spent, as opposed to reducing price just to convert the first deal.
- The closer the solution is to its large-scale rollout state, the more pricing should already be set at a level that will allow for broad adoption. SaaS offerings are often in this category. Additional developments are better included in upgrade packages or sold as Add-on modules, as opposed to drastically altering the core price over time.
- Usually price is highly-visible, probably much more visible to most stakeholders than a company´s long-term plan to penetrate a market. Startups should set price at a level that gives employees and partners a sense of pride and security that the business has the potential to create substantial value and reduce its reliance on investor funding over time.
With many early-stage Investee-Partners now entering the commercialization phase, we have recently enjoyed engaging in numerous pricing discussions. We hope we have been able to offer some valuable assistance in this area and that “the price is right”.
Your bm|t Team
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