You have spend nights, tears and money to develop a fantastic new Product. Excited, now getting ready to launch it to the market, but there is a big unknown: PRICE! Establishing the right pricing is one of the most critical step for your Venture. Unfortunately, many innovative Startups fail to capture their true value potential because of inadequate pricing.
Avoid common Pricing pitfalls
Lowest bid wins it all
Confronted with uncertainty, many Entrepreneurs are looking for ways to undercut the “market”. It is a common misconception that a low price will increase the likelyhood of success. In reality offering the right Value is key to sustainable success.
Do not blindly follow the pricing herd
There is a large wave of solutions which are being priced through a monthly subscription fee model. While this brings many advantages, your customer group might be used to a very different model e.g. one-time fixed price.
Free “Proof of Concept”
Winning a first customer is a challenge for most new Ventures. Getting a track record has often priority to first revenues. However, offering a Free solution does not demonstrate if you provide true customer value, or confirm Readiness to Pay.
Project consulting temptation
Selling a new solution often requires some pre and post sales consulting. While these consulting revenues help pay the bills, they are not scalable, non-recurring, postpone price discovery and distract valuable resources away from building a great product.
Maximise customer perceived value
Being aware of the pitfalls, implementing Value based pricing for startups is primarly about customer perception.
Anchoring value through a high price point
It is key to position the Value point for your product as high as possible. This provides an “anchor” for any future reference of value. It also pushes you to offer true benefits. Second it is very difficult to “work your way up” from a low price point.
Match customer value points
Remember that customer perceived value extends way beyond pricing. This augmented value includes reputation, brand, leadtime or quality. It is an opportunity to revise your Product delivery, Make vs Buy to best match key customer value.
Maximise value from product Features
Acknowledging that each customer within the defined segment will have different needs, you should take the opportunity to establish a feature-based pricing model. This will further guide your product roadmap towards the most valued features.
Simple pricing to optimise readiness to pay
From day one, your pricing should support customer readiness to pay. A subscription, % or unit based pricing can enhance the stickiness of your product and bind customers over a longer period of time. Sometimes pricing simplicity can increase customer value.
Implement a successful Value Based Pricing
Define your target customer
Pricing is a reflection of perceived customer value and hence highly depends upon your target customer base. One helpful framework for this is to use a user Persona.
Assess market value
Survey and evaluate the customer perceived value for each persona and the product being offered. This includes evaluating the pain points, product features, and eventually readiness to pay.
Validate customer benefits
Understand how you create value for each customer. It is important to quantify specific process-level benefits derived from cost reduction, higher efficiency or increased quality .
Setting the Price
Your price will be reflect additional value creation, price of competing solutions or products and value capture strategy e.g. Premium pricing. You might include feature-based or subscription based pricing as appropriate.
Lean Pricing method
Continuously gather specific pricing feedback and market intelligence to narrow down which features ‘ideal customer profiles’ will value the most. This will also allow to fine tune the value capture and pricing, particularly important in rapidly evolving Software markets.
A Quick Guide to Value-Based Pricing, Harvard Business Review
What is Value-Based Pricing?
I like to use this definition: “Value-based pricing is the method of setting a price by which a company calculates and tries to earn the differentiated worth of its product for a particular customer segment when compared to its competitor.” Read along
In essence, shifting to a Value-based pricing model will not only maximize profits but more importantly foster an on-going understanding of your customer value proposition. For some it might come as a surprise on what customers truly value, focusing on product features you didn’t know were important .
We are curious to hear back from you and your specific experience as you implement this value-based pricing for your business!