What’s Your Price?

‍The Obsession with Pricing 

With my friend and long-time collaborator Nick Houldsworth, I have run pricing workshops for over 100 startups over the last couple of years.

One obvious theme is how concerned - almost obsessed - founding teams are with “getting the price right”.  We always break the bad news early - there is no silver bullet when it comes to pricing.  You should fix a few other things before you worry too much about it.  And more importantly, the biggest challenges in pricing often have nothing to do with pricing.

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The Pre-Pricing Foundations

Before you even take pricing (and packaging) seriously companies need to have resolved a few other matters that will have pronounced and direct impacts on the price of your offering in the market.  

1. Your Ideal Customer.  Unless you know who you are targeting - often the segment of the market that is most successful with your product - it is very hard to even think about pricing.  Most early-stage companies try to sell to multiple audiences at once - this is not often a winning strategy.  But it might be a great way to get market feedback, experiment and learn.  You need clarity on Your Ideal Customer Profile (ICP).
2. Derived Economic Value (DEV).  How does your ideal customer describe the value they get from your product?  How does that equate to dollars?  If you don’t know this for sure, pricing is simply guesswork for both parties.  There are only three ways to derive economic value in business; increase revenue, reduce costs or manage risks.  This is mostly relevant for B2B, but the principles also apply for direct-to-consumer propositions even if the framing is a little different.
3. Share of DEV.  What share of the derived economic value could and should you take?  When you start out, you typically solve a smaller subset of problems for customers, but over time, that will increase (that’s what product management is for!!!).  In the cloud software world, most companies start out taking 2-3% of the value derived by customers.  The best companies hit 20% (i.e. if you save your customer $1,000 a month, you could claim up to $200 of those).
4. Channel.  Is your strategy to go direct or through a channel?  If your plans are to sell through channels, then you will likely need to align your pricing model to those of your partners.  This channel-pricing conflict is a real source of tension out in the wild, so think about this carefully before you design your pricing plan.
5. Process.  Pricing is not an event - there is no answer.  It is a process, just like marketing or support.  Once you understand this, your people and company will immediately get better at pricing.  Treat it like you might some of your other core processes, even if it is often not clear on who should ‘own’ pricing (it does not fit nicely in any of; marketing,sales, finance or product - bummer!!!).

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Making Progress on Pricing

So if you’ve sorted all of the above, and you are on the pricing bus, what next?

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Well, there’s lots you can do, like:

• Run pricing experiments.  Lots of them.  You can put prices on the interweb and do all kinds of tests.  You can try new pricing models, or focus on a segment or a geography.  And the offer does not even need to be real - you can always compensate a disappointed customer with a “we are sorry we mucked you around” voucher or special offer.
• Ask customers lots of questions.  They will tell you what something is worth.  They will tell you what they pay for other tools and products like yours.  If you qualify customers, they will tell you what alternatives they have or are considering.  Customers are the best source of information for EVERYTHING to do with pricing.
• Implement a pricing programme or team.  It might meet once a quarter, but at least you are starting on your ‘pricing is a process’ journey.  Comparing notes with other, similar companies will help you plenty too - you are not the first person to ever think about pricing.
• Learn. Pricing is or will become a core skill and process in your company and certainly will have an impact on your long-term success.  Companies like Simon Kucher - the world’s most successful pricing advisory firm - have some great resources on pricing if you want to explore pricing seriously. 
• Stress a lot less about pricing.  If you are early in your journey, you have plenty of time to improve.  You should spend a lot more time on making your customers wildly successful and sourcing real talent for your company first.  Pricing can almost always wait till later.

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Pricing is important and must be on your agenda (clue: everyone charges way too little when they start out).    Investors and VC’s will have plenty of opinions on it, but you don’t necessarily have to if you are early in your startup adventure

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As long as you intend to get great at pricing at some stage, plenty of other things come first.