There are so many questions that keep entrepreneurs awake at night:
Will our startup make enough revenue?
Are we going to find investment?
Will the market even want what we’re offering?
How should we price our offering?
The last question isn’t always at the forefront of our mind as we go through the preparation stages, but preparation is key and pricing is crucial to your success. In this article, we’ll soften the dilemma for you by assessing how you can set pricing for your startup’s services.
1. Take a look at the competition and the market
Sometimes, the competition is the market, and there’s often no better way to gauge how you should set your own prices than by taking a look at the competition and target audience.
The competition won’t determine exactly how you’ll set your own prices, but they’ll give you a better feel for the market in terms of what others are charging and what people are prepared to pay – or not pay.
For example, if you price your service considerably higher than your rivals, you’ll be handing them the advantage. Similarly, if you price your services a lot lower than theirs, the customer’s perception of your offering might be “this isn’t very valuable.”
At the same time, there will be instances when you can afford to price your service considerably higher than your rivals. For example, in my own personal experience, I knew that our service had access to more expensive supplies, and that while what we were offering was essentially the same as our rivals, the quality was higher.
Robert Cialdini wrote in his book Influence that it sometimes pays to price your service high. It’s all to do with how the customer perceives your service. The more expensive it is, the more it is perceived as being valuable. This makes it more attractive.
Don’t just consider their base prices – take a look if if they offer any price-sweeteners, too. For example are they offering a “buy now, pay later” incentive?
2. Assess the value of what you’ve got
This can be hard to do. How do we know how much our service is actually worth to people?
The best thing to do is to take your offering and break it down into its individual components. This includes the core service, as well as any customizable features, extras and so on.
Then, work out what benefits each component provides, as well as what they are each worth to your customers.
Bear in mind that if you value your service too low, you will end up with low value customers. This will mean that you’ll need to spend a fair amount just to land customers who spend, say, $30 with you and then never return. Is that what you want?
When working out pricing, you also need to take costs into consideration.
3. Work out your costs
Costs are what can break us. The more we produce, the more it will cost us.
For example, if you have a physical product you’ll need to take into consideration storage, raw materials, packaging, labor costs and so on. It really builds up, and if you don’t know what your costs are, you might find that your profit margins are awful.
Take into consideration all your costs, and this includes research and development. If you end up setting your price lower than your direct variable costs, you’ll lose out. Once you start charging more than your direct variable costs, you’ll start to cover them – and make a profit.
Know what you need to do to break even, and know what you need to do to make a profit.
4. Discounts
Discounts are a pricing tactic that should be considered at the right times. This is key – if you offer discounts too often, your customers might be confused as to what your normal prices actually are.
A bulk discount is a tactics that often works. It encourages bigger orders. Meanwhile, a clearance discount will prove useful whenever you need to clear out excess stock that’s been costing you too much to keep in storage.
5. Have more than one pricing plan
The advantage of having more than one pricing plan is that you’re not servicing – and thus you aren’t limited to – just one customer. This gives you the flexibility to serve two ends of the market.
For example, you could have a free pricing plan and a premium one. This has to be a deliberate, well-thought out decision, however. Hubstaff went down this route, but customers found their free plan so attractive that few were prepared pay for the premium one.
Wix is another company that offers a free plan and a paid one. However, their free plan comes with a catch – the customers website must display ads. For Wix, this means free advertising.
6. When to raise your prices
A question many startup owners have been asking a lot over the years is, “Ok I started off with a low pricing strategy, but now I want to raise them as my profit margins are poor. When is a good time to raise prices?”
Increased prices = increase profits, right? It’s basic math. However, a sudden – and sharp – raise in prices can also have an adverse effect on sales.
The best thing to do is find out what the market and your customers are saying. Carry out a little research and learn whether folk would be receptive to a price increase.
When you do decide to raise your prices, make sure that you:
a) Warn customers of the change in advance
b) Emphasize the benefits of your service. Why are you raising the prices? Remind us of how great your company is.
Sometimes, it’s the case that we roll new products out. If a product of yours becomes redundant, take it as an opportunity to bring out a new product and raise the price. If you’re subtle, your customers might not notice the increase.
7. Monitor your prices
Prices go up – but they also come down. They change often. Why?
One reason could be the competition. Our company kept a constant eye on what our rivals were doing, and this didn’t just include how they were setting their prices.
For example, if the competition is floundering and you’re starting to dominate your sector, you can use this as a chance to increase your prices.
On the other hand, if your market share is low, something needs to change, and lowering your prices might be the answer.
It’s just good practice to monitor your prices often so that they are optimal. Adjust according to the market, your success, but also adjust according to how customers are perceiving the value of your service. People change and you need to change accordingly.
All in all, there’s no magic bullet for pricing. It all comes down to knowledge – of your costs, the competition, the market – experimentation, and constant monitoring. It’s hard work but if you take heed of the advice in this article you’ll be in good shape.
