Every winning Go-to-Market Strategy is complete with a compelling product offering. Aligning your price and product offering to resonate with your ideal customers is how you stand out in the marketplace.
Pricing strategy is one of the fundamental decisions in how you take your idea to market and turn it into a profitable business. Like a lot of decisions along the way, for entrepreneurs, pricing is a learning tool.
Setting a price in the market and seeing how your customers react lets you know who wants your product and how much they want it. You’ll learn what value your product provides and which channels are effective to acquire customers willing to pay for it.
What are the Fundamentals to Winning Price Strategy?
Charge money
One of the fundamental things in a pricing strategy, as obvious as it sounds, is to charge money.
The price you set has a big impact on its perceived value. So you can't be afraid to charge for your product or service. If what you're providing has value, people will pay for it. If it doesn't have value you'll learn that quickly and it's a priceless learning opportunity.
It can feel hard when you're just starting out because you want any customer you can get to prove success, even if that means giving it away. If you're giving away your product or service, your customer can perceive that to mean it’s not providing value.
Customers pick up on that feeling and will be shy to take a risk, even if it’s free. Charging money really changes the dynamic between you and the customer. The conversation moves from begging for attention to being a trade of money for a product or service. Charging money, even a reduced amount, gives your customer a way to judge the value of what you’re providing.
When you're not charging money, you're really delaying that learning opportunity to see how valuable your product is to the end customer.
Pricing isn't permanent
It's a big misconception to think that pricing is set in stone. Pricing can and should change.
Don't be afraid of making the wrong choice when you set your initial price. As long as you evaluate and course correct, it's a learning opportunity.
As your business grows, you would expect that what you're offering evolves with it. You would expect your customers' expectations to evolve and their perception of your product would change along with it. It only stands to reason that pricing would change, too.
Create a hypothesis, test, validate and iterate.
Target audience
When in doubt, keep the customer front and center in decision making. You want to price your product with your ideal customer in mind. You don't want every customer, you want your customer.
If you haven't already, go through the exercise of thinking about your target audience and creating a buyer profile or a customer persona around that target audience. The better you understand your target audience the better you can price your offering with them in mind.
As you go through the exercise of carving out who your buyer personas are, think about what this purchase means to them in terms of their overall budget. Is this something they're gonna be price sensitive on? Is this something they need to save for? Is this a big purchase decision? All the answers to these questions factor into how you price your offering.
Customer research
Maybe the best return on investment for any founder comes by conducting market research.
Ask potential customers. Survey them, talk to them. Test different strategies.
When you're early in a start-up it feels like you need to win each customer interaction and that there won't be more coming. There will be plenty of customers if you have a viable product or service to offer. There's going to be more customers coming your way and the more you interact with to the better you’ll understand their needs.
The customers you're attracting early on are people who get what you’re offering right away. So, ask them: how valuable is this to you? If I can solve this problem, what is it worth to you?
You might be surprised by what you learn when you ask your customers. Asking for feedback has the added benefit of leading some of your customers to be more invested in your success. They shared their insights with you and now they want to see you succeed- especially if it’s by incorporating their feedback.
Price on value
When determining a price there's a dozen different ways you can get to a pricing strategy. At the end of the day though, the most reliable way is to price on value.
What is the perceived value of what you're offering vs. the price? That's ultimately the decision the customer is making. They’re asking, “is this solution worth this amount of money to me?”
Cost-Plus Pricing is a common method for determining a price, but it can be misleading and you can make false assumptions about the price structure. Cost-Plus Pricing is where you determine the costs that go into creating the product or service, delivering it to the customer, with some margin built on top of that.
This method is best for mature marketplaces, especially where there are physical goods involved.
As an example at Nike we knew the price of every product before it was built. We had a very mature cost structure. Often the pricing strategy started with a concept and a price in mind and then worked back from that price to maintain the proper margin, changing and tweaking the product to fit within that cost structure. That kind of precision takes scale and years of refinement.
Cost-Plus Pricing should be known, but it's a guardrail for how you develop your business, not necessarily how you price your offering. If the perceived value is lower than your Cost-Plus Price, you're not going to make profit. In that case you need to rethink what you're offering to the customer or your cost structure.
Especially early in a company's growth, cost can be higher than the price customers are willing to pay. The customer doesn’t care that you have high overhead. They only care what problem you’re solving and how much you are charging for it. The other factors in that equation are personal to you, the business owner, the founder, but have no bearing on the customer's decision.
Setting a price based on value will ensure you’re thinking about the transaction from the customer’s viewpoint. It’s going to lead to a lot more successful engagements with potential customers.
Price is not a differentiator
If one of the key differentiators you're building your foundation on is being lower priced than the competition, you’re in trouble. That's not a winning formula.
It's not sustainable to start there and it should indicate to you that you need to rethink what you're offering.
Maybe what you're bringing to market doesn't have the features it needs to command a certain value. Maybe that market is crowded and you need to narrow your scope or find a niche that isn’t being served.
Often in entrepreneurship there's a concept that competition is good, that competition brings out the best and only the strong survive. That’s not necessarily true.
In reality, you’re looking for a space with a lack of competition. Then hone your strategy, product offering, or customer segmentation to serve that area where there isn't a breadth of competition.
Market research
Competitor pricing is a huge factor. While we say that being the lowest price isn't a differentiator for startups to win, competitor pricing is critical to take into account.
There's no harm in looking at your competition’s price structure. Then think about how you're differentiating versus what they're offering. Maybe there's a feature you have that they don't. Think about what the value of that feature is worth to a customer. It's a great place to start.
You need to know what your competition is offering, because your customers will.
Keep it simple
Don't overthink it. As we said earlier, pricing can change, so keep it simple. Start with a price that feels close, learn, and evolve.
Keep the pricing structure simple and easy to understand. We've all subscribed to a software service where there's multiple packages at different prices that give you different features. That's confusing and overwhelming to a customer. You’re already trying to educate the customer on what sets you apart, don’t complicate it further with how you price your offering.
If it's difficult for you to explain, it's even more difficult for the customer to interpret and understand what they're getting for their money.
Pricing, just like other decisions for startups, is an opportunity to test, learn, and iterate. Don't Overthink it. Don't let the pursuit of perfection keep you from getting your product in front of customers. Create a hypothesis, test, learn and iterate.