5 Key Concepts for a Smart Startup Pricing Strategy

ED LEE, FOUNDER AND CEO, HELLOADVISR

14 NOV 2017

Building a company is no easy task. From creating a product to hiring the rst employee, there are
a multitude of things an entrepreneur must do to get the company o the ground.

One of the things that often gets lost in the shu e (and really shouldn’t) is the startup’s pricing
strategy. Too often the task of pricing is left to the very end of a product launch, but entrepreneurs
should really take the time to build a thought-out pricing plan to achieve larger goals for the
company.

The result? For many startups, it’s going to market with an unachievable revenue model, diluted
value in the product and the company, and limited pricing capabilities to address current and future
market pressures.

So what can entrepreneurs do today to ensure value is not lost? Here are ve essential concepts
you need to understand to start building your pricing strategy.

Know your product’s (pricing) value

Today’s entrepreneurs have been doing their homework and now understand that pricing is a
function of a product’s value. Yet when asked what value means, they nd that the question is much
harder to answer than it appears. For most entrepreneurs it is easier to create value through
products than to extract value through pricing.

In the simplest terms, value in a pricing context is the bene t customers receive through your
product or service. This is not a feature or a price point, but the reason why customers want to use
your product. Even if this seems obvious, it’s often one of hardest exercises for startups because it
is overlooked during the product development and customer discovery stages.

The heart of a high-impact pricing strategy is identifying two drivers: what brings customers to your
product and what gets them to pay. While subtle, the distinction is material—just because a
customer is willing to use your product doesn’t mean they’re willing to pay for the product. Get to
the heart of your product’s value and you’re one important step closer to building your pricing
strategy.

Leverage insight powers of pricing

Many startups actively do research on the market, customers, and competition. This research can
be anything from collecting answers to short one-question surveys to longer and more involved
studies. While conducting this research, many entrepreneurs ignore pricing as a signal, because
they fail to realize how pricing and speci cally the development of a pricing strategy can provide
invaluable insight to the customer and market.

Unlike other forms of research, pricing research is focused on understanding the one thing
customers are less willing to part with—money. When startups start to dive into pricing questions,
new insights on product-market- t are generated that would otherwise be di cult to determine.

For example, it may turn out that a killer feature all customers loved during product testing may not
be one that those same customers are willing to pay for. This raises questions not only for pricing,
but also for the product, sales, and marketing teams. Should the company continue developing the
feature? Will changing the price level change customers’ willingness to pay? How will sales and
marketing ll the gap between current perception of value and the desired pricing?

These are di cult questions, but they can provide vital insight, not only into how a product should
be taken to market, but also into the startup’s objectives and its capability to successfully execute
them. Failure to capture this insight into a pricing strategy can lead to a rude awakening.

Pricing is a strategic and tactical weapon

There is often a “set it and forget it” mentality when it comes to pricing, but the best companies
understand that a strong pricing strategy is a source of competitive advantage.

With clearly de ned objectives and planning, startups can use strategic and tactical pricing to
achieve larger goals. For example, Apple rarely discounts their prices, and instead often o ers
discounts via iTunes gift cards. This is an intentional, well-designed strategy. Strategically, Apple’s
prices are purposefully positioned to signal to customers and competitors that its products are
premium-tier. This also makes price a non-negotiable factor, causing customers to evaluate other
factors to determine their own willingness to pay.

Pricing is also a tactical tool to achieve measured and often short-term goals. One example is the
use of promotions to increase basket size (i.e. the number of items purchased in a single
transaction) or move unwanted inventory. In other situations, a company can use pricing to
unbundle products or features to increase the perception of a ordability. This tactic is commonly
used, for example, by airlines. Features such as baggage and food are unpacked from the overall
o er to bring the presented airfare price down and increase the likelihood of a sale.

Mindset for leaders and teams

One of the most important success factors to an e ective pricing strategy is the mindset of the
company’s leaders. Company leaders set the vision for the company’s pricing strategy, but also the
development, execution and maintenance of pricing. This is a classic example of success starting
from the top.

Whole Foods’ co-founder John Mackey brought organic foods into the American mainstream and
reshape how people viewed healthy eating and food sourcing. He also introduced prices to re ect
the value he saw in foods that delivered this value.

While earning the store the cheeky nickname “Whole Paycheck,” Whole Foods’ prices were both
intentionally and purposefully high: they shaped perception of premium value, created a sense of
uniqueness and practically, and helped to drive pro tability and growth. This pricing strategy started
from the top, with leadership setting the goals.

A purposeful pricing mindset isn’t found only in large corporations, but in startups as well. The
Information, a digital media company founded by Jessica Lessin, went against digital media trends
and put up a paywall to monetize for the quality content they were creating.

How much value did Lessin see in their product? No less than the Wall Street Journal. The
Information’s annual subscription is priced at $399 or 18% more than a comparable digital-only WSJ
subscription.

When pricing starts at the top, it sets the tone for the rest of the company. Leaders guide their
teams on what value means and how pricing decisions are made. For startups where leaders don’t
take up the pricing mantle, their product’s value is diluted through poorer pricing decisions and
impact opportunities to drive revenue and pro t growth.

Way to keep your light on

This is perhaps one of the most obvious essential pricing concepts, but the pricing strategy should
be designed to help the company grow nancially, starting with not losing money (for too long).
Many companies disassociate pricing and nancial objectives, often to the detriment of the startup.

It is vital for startups to understand that they are building a business and this means that their
revenue model needs to be built on better and stronger pricing. When prices are misaligned with
value and willingness to pay, the nancial results for the company often re ect that truth.

Building a pricing strategy also means identifying nancial tradeo s. For startups this can mean
speed of growth, market penetration, and pro tability. It is critical for startups to assess desired
short-term gains, but also the implications those decisions have for sustainability beyond. Many
startups end up discounting and competing on lower prices for short-term gain, only to nd
themselves either unable to retain customers or stuck with a broken revenue model.

Final thoughts

Startups are challenged by many things inside and outside their companies – from limited
resources to competitive pressures. Pricing is one area where startups have some power to shape
their own destinies, but it requires a thoughtful strategy built on actionable insight and leadership.

It’s easy and common for startups to push pricing to the backburner, but before too long, they nd
out that it’s too late. Make the e ort today to understand the components and work required to
build a strong pricing strategy. It can create be a well-earned advantage many of your competitors
will overlook.
This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's
situation is di erent! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.

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