Several discussions with entrepreneurs in the last weeks about product pricing. Both for consumer and SME offerings the price pressure is huge, similar products brought to market by startups with high amount of capital are given away for free or for very little.
And, at least for a certain category of product/market (more later on “zero-gravity” business models), affordable pricing is a key to rapid market adoption. So people spend a lot of time thinking about how to price for easy uptake and viral growth. That all makes sense. What we now have is the price list for steady-state.
The challenge: This price list is really low. And all of a sudden it becomes impossible to understand how the business will make any money before it has thousands of customers. And now we are stuck.
The solution: You don’t use that price list to make your first sales. Your first sales are all about:
- Customer validation: There are dogs and they eat the dog food and they pay for it. Repeatedly and gladly.
- Path to Ramen Profitability: Trying to ramp up some revenues so you can fund your hopefully very minimal cost base. More on the virtues of ramen profitability here.
- Extracting maximum margin contribution from each customer interaction: If you want to become ramen profitable you have to get as much money out of as few customer transactions as possible. The bigger the transaction the better. At the same time you cannot be too picky about who you accept as a customer, so the goal is to get the most from every customer, which may be a lot for some and not so much for others. No matter, as soon as you have extracted all of it.
The key instrument for this is a long and complicated price list. Think Oracle database licenses. Better yet, study pricing for products such as Salesforce CRM. Ideally you have multi-dimensional price drivers, e.g.
- Number of seats. Possibly different kinds of seats (e.g. heavy vs. light, internal vs. external, etc.)
- Different modules, e.g. CRM+SFA+Helpdesk+etc. etc.
- Different editions, e.g. Basic vs. Professional vs. Platinum
This price list is your secret weapon for constructing custom deals where you sell more or less the same product to one customer for price X, and to another for something very different from X. And where both you and the customers feel that this has been a fair and reasonable transaction. Remember, your goal is to:
- Take all of the captive budget
- Be comfortable when customers meet and compare prices. They must feel that their own offer has been logical and fair.
Use this price list for your first phase of customer interactions. Switch to the zero-gravity price list at a much later date. And sweeten the transition for your installed base via special promotions if you can. If you cannot then relaunch your product under another name…
Some interesting reading material here, especially re structuring the price list so that people end up where you want them to: http://conversionxl.com/pricing-experiments-you-might-not-know-but-can-learn-from/
This here also excellent: http://firstround.com/review/pricing-lessons-from-working-with-30-seed-and-series-a-b2b-startups/