What’s in a Price? The Road to Making Better Pricing Decisions

Frances Simowitz
Frances Simowitz
Managing Director at NUMA New York
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“That’s too expensive!”

As a startup founder, you’ve probably heard this many times. Whether it may be a potential investor who’s skeptical investing money in your company or a customer who seems unwilling to purchase your product, the value attached to your product is always a conversation that you have to go deep into.

But what’s really in a price?

To dig into this, we had a chat with Robert Goldberg & Matthew Sawyer from Rocket Market Development, a boutique consulting firm that helps companies enter new markets and grow revenues, to share their thoughts on the intricacies and complexities of pricing.

According to Robert and Matthew, finding the right price involves an interplay of Product Position, Competition, and Customer Perceived Value.

For startup founders, pricing becomes a tricky space because it signifies how much you know about the market and your customers’ willingness to pay. It also signifies how much you, a producer of a good, are willing to sell a product or a service that you have spent months building. The price can set your position in the market.

Moreover, if you’re looking to scale your business in the US or in any other country, understanding pricing becomes twice, sometimes thrice, of a challenge. Not only do you have to understand the landscape and competition in this new territory, you now also have to capture a different perception on value.

Robert and Matthew shared some key things to remember when pricing a product or a service:

1) Understand your customers and the decision-making process that they go through

It’s easy to dictate a price based on the costs and expenses that you have in setting up the product and the business. It’s easy to look at the company’s cost structure and calculate which price would give the company the most return on investment. Yet, looking at the firm’s cost structure is only half the battle — the other half is understanding your customers and the decision-making process that they go through before actually purchasing something.

One of the key decisions that you have to make for your business is determining whether your product is focused on B2B or B2C transactions or both. Clarifying this at an early stage will help you understand your customer better and identify the nuances in pricing for either of these customers.

Here are some questions that you might want to ask:

  • “What is the profile of the customers?”
  • “What’s the financial capacity of my customers?”
  • “What did customers do before our product or service? What was their alternative?”“Does our product or service add value to what they do today?”
  • “Who is the competition and what are they charging? How close is my product or service to theirs?”
  • “Who is the decision maker in the purchase and what is the process that they go through to make a decision?"

If you’re looking to scale your business in the US, you might find some nuances on consumers’ willingness to pay and the value that they attach to a product. Perhaps in other countries, people are much willing to pay for your product based on comfort or the sheer enjoyment of it. Yet, for countries like the US, consumers might probably evaluate your product based on how much time they’ve saved in using it. Perceived value really depends on each individual and group and the best way to understand this is by engaging well with your customers.

2) Emphasize Value vs. Actual Price

One way to best determine the price of your product is to look into the unique value that your product brings. If your differentiator is pricing alone, then it’s time to look deep and find your core value. A competitor can always lower their prices to match yours but it takes more time and effort from them to copy and compete with the value that you bring to your customers.

In understanding the value that you bring to the table, you can start by identifying the type of product that you have. According to Matthew and Rob, there are three types of new products:

  • Supplemental or additive — products that help complete the customers value-chain. These products will be used in conjunction with what the customer is doing today. An example of this would be Streak, a software that adds CRM features to Google mail and lets you track correspondence with a client. Hunter MailTracker is another fantastic product (and free web extension) that lets you know when clients have opened your emails.
  • Replacement — products that replace the customers product and will be used instead of what is being used today. An example of this would be the phone cameras, which replaced the hand-held point-and-shoot cameras.
  • New New — products that the customer has to be educated on and ones that they may be skeptical of the value right off. An example of this would be IBM Watson AI, a software that integrates AI into all aspects of the business process.

Once you’re able to identify the type of product that you have, it’s now easier to communicate your unique value and anchor your product to the needs of your customers.

3) Communicate your pricing early on

To get their foot in the door, some startups may offer their products free at first to get traction and then try charging for them later. Now, this feat can work both ways — either the customer has already become so used to the free product that paying for it becomes a barrier (anchoring bias) or that the customer has fully realized the value of the product and is now ready to pay for it. Of course, we prefer the latter — we want customers and clients to be deeply hooked that the opportunity cost of not having the product is now higher.

No matter the case, communicating your pricing early on is essential, so as to manage the expectations of your customers. More often, you’ll hear words such as “beta,” “pilot test,” or “test run” attached to a product offering to indicate that terms can change and the free version of the product only lasts for a certain time.

4) Lastly, don’t procrastinate on your pricing decisions

According to a study conducted by OpenView, 50% of the companies make the mistake of procrastinating on their pricing decisions. Companies wait for a little before the product launch to make decisions on pricing. Moreover, even when decisions have already been made, they were done with little to no data. This is one thing to avoid. Pricing decisions should be done with as much diligence and testing as possible. Even if price may still change, the earlier you rule out your assumptions, the better.

Overall, making better pricing decisions really start with understanding the value that you bring to the table. As you start launching your business, it is essential that you spend as much time and diligence researching your competition and understanding and engaging with your customers.