One of the most important decisions for any startup, especially those with an enterprise focus, is figuring out the price to charge for a product or service. But figuring out the “right” price to charge for a product or service for any start up is hard to do. There are a couple of reasons for this. One reason is that price can serve as a proxy for quality. That means if a price is set too low, customers might perceive it as a low quality product. Secondly, assuming there is a quality product but prices are set too low, it will attract a large number of customers. Unfortunately a lot of money will be left on the table at the same time, and the startup will find it challenging to raise prices in the future. On the flip side, if prices are set too high, it will be a struggle to land customers and cash flow issues could come up.
So what are you supposed to do? This post provides what we consider the top three things enterprise-focused start-ups should keep in mind when evaluating price points based on a recent discussion we had with S3, our portfolio company based in Vietnam. Simple Solutions or S3 is a SAAS company that helps wholesalers in SE Asia better manage inventory levels and also facilitate the sales order process with the retail outlets they serve.
1. Determine what stage you are in and then set your pricing.
If your company is pre-product market fit, then the focus should probably be less on what the optimal price point is. Rather, you need to demonstrate that people will actually pay for it and to try and get a financial commitment right away. (Suggested Reading: The Mom Test by Rob Fitzpatrick to understand importance of getting a financial commitment right away.)
The S3 team will be the first to tell you that we spent a couple of weeks debating price points after their launch in late 2015. In the end, we helped them realize that unless you have product market fit, it is pretty much a guessing game.
2. Decide on a pricing strategy and stick with it.
Choosing an appropriate pricing strategy is all too often treated as an afterthought. But if you ask any MBA student, and probably most repeat founders, and they will tell you that your pricing strategy could mean the difference between success and failure. Why? Pricing forms an integral part of your go to market strategy. And if you are constantly changing it, you will confuse customers – which will hurt your brand and result in lost customers. Tomasz Tunguz from Redpoint Ventures recently wrote one of the best pieces on different pricing strategies, where he details the top three different pricing strategies that any company can consider.
In our experience, and given the high level of competition and open source opportunities out there, we see most SAAS businesses fall into the “Penetration” category. Our portfolio company S3, is no different. Now that they have recently achieved product market fit, their focus is now on pricing their product low enough that it can win dominant market share across South East Asia.
Their entry-level price for their most basic features, is, in our opinion, a steal vis-a-vis the benefit wholesalers achieve. However, their price is currently set at a level where it also minimizes adoption friction in a way that will allow them to grow quickly and later to move up-market after developing broad adoption.
3. Follow a value based pricing methodology.
In order to set a price, you’ll need to form a hypothesis. You should A/B test it, use other analytics to refine it, benchmark it against competitors, and evaluate local market conditions. (For example, an S3 monthly price per license might not seem expensive in the U.S., but in places like India and China, that could be very expensive.)
However, most enterprise customers only care about outcomes. They are less enthusiastic about the features your product has to offer and how it stacks up against competitors. This forces start-ups to really understand their customers and ultimately, if done right, leads to what we like to refer to as value based pricing.
Value based pricing is a method where you charge the customer 1/10 of the value or benefit received when using the product. As we work inside a large corporation, we can confirm that it is hard for any manager to turn down a solution where you can realize 90% of the benefits at 10% of the cost.
In summary, pricing is not a set and forget exercise as the value being derived from the product will change over time. Therefore, it is important that founders periodically assess their pricing strategy. If you are interested in obtaining a broader understanding of pricing and pricing strategies, I would suggest reading The Strategy and Tactics of Pricing. It is a comprehensive and practical, step-by-step guide to pricing analysis and strategy development for any stage company.