Founders don’t spend enough time examining pricing. They’re too busy working on more important issues such as releasing version 2.0 and raising enough capital to keep the doors open. Brilliant entrepreneurs who build useful products generate substantial value, but in order to capture this value, they must implement rational pricing strategies. If you’re one of these entrepreneurs, here’s a quick guide on how to get started on pricing and avoid the most common traps:
First, study your competitors. Don’t reinvent the wheel. Even if you’re stronger, faster or prettier, it’s safe to say your competitors have done some homework already. Research competitive products’ websites and go through their purchase processes. Ask some of your prospects or beta users how they evaluate products or services in your space and what their decision flow is like. Is the customer accustomed to modular or all-in-one pricing? Are there price tiers? How steep are volume discounts? Note surprises and nuances that apply to your business model.
Next, launch softly with a high “introductory” price. The concept of an “introductory” price is powerful because it grants leeway for adjustment, yet also creates a sense of urgency that drives business through the door. Circulate this price freely among beta users, email subscribers and other ready-to-buy prospects.
Your introductory price should be enough to cover costs, but there’s no need to stop there. Consider pricing your product at the high end of your comfort zone. Although it’s hard to increase your prices once they’re in circulation, you can readily reduce them. Furthermore, a high introductory price sends a signal to the market that you have a quality product.
At LogMeIn, a company I used to work for as vice president of online marketing and operations, we priced an iPhone app at $39.99 back when most apps were less than $2. Despite some initial complaints, enough customers accepted our price point that the software became a Top 20 grossing app.
Over time, test a cross-section of lower price points. Once you’re comfortable that prospects understand your pricing model and your price point is in the right ballpark, you can periodically lower your prices through one-time discounts and product bundles. It becomes easier to fine-tune your pricing as volume increases.
One handy way to price test is to divide your prospect email addresses into random buckets, issue coupons and measure total revenue generated. We once tested four coupons for LogMeIn Pro: $59.95, 69.95, 79.95 and 89.95. Customers reimbursed the highest proportion of $59.95 coupons, but the $69.95 coupons generated the most revenue, so we lowered our price accordingly. If lacking a big prospect database, you might perform a similar test by striking through old prices on your purchase page, offering new prices each week for four consecutive weeks, measuring the revenue generated, and tweaking appropriately.
Finally, examine pricing attributes in the context of your overall business:
- Published pricing is a blessing and a curse. This applies primarily to B2B companies. Price awareness lowers the friction for silent prospects who are close to purchasing, but it also diminishes your flexibility. If you choose to publish pricing, you can avoid boxing yourself in by requiring expensive price tiers and high-volume customers to contact you for information.
- Free and freemium models drive growth at the expense of short-term profitability. If you can afford it, consider giving away parts of your product or service for free. Explore capacity based freemium models, which require customers to pay beyond a usage threshold, as well as feature-based freemium models, which provide free basic features yet charge for premium features.
- A little grace goes a long way. You don’t need to immediately penalize customers for exceeding price tiers or breaching license agreements. To your customer, there’s nothing worse than logging in to find a big red X or coming back from vacation to realize service has been discontinued. Utilize grace periods and friendly messaging to keep customers happy so they become evangelists and refer more customers.
This article originally appeared in “The Accelerators” blog of the Wall Street Journal. A link to the published post is available at: http://blogs.wsj.com/accelerators/2013/04/12/poor-pricing-kills-startups/.