Proper product pricing will drive growth like nothing else. Follow these startup pricing tips to determine a good starting price for your B2B product.
Startups that don’t get pricing right pay a huge price — they can’t scale properly. Yet, most companies don’t spend enough time developing a smart pricing strategy. According to ProfitWell, the average SaaS startup spends a total of six hours on pricing. To create an effective pricing structure, conduct enough market research and uncover the value of your product. Then, you can jump in and test, measure, and learn. Here’s how to get started.
- If you don’t get pricing right in the beginning, it’s going to be harder to scale.
- Don’t focus product pricing on your costs and your desired profit margin — what matters is how your product helps your customers profit.
- To determine pricing, find out the value your product offers your market and then work backward, optimizing your product and processes to generate more value.
Why Pricing Is Important for Startup Growth
If you price too high, acquiring customers is going to take too long and cost too much. Price too low, and you won’t have enough revenue to cover expenses comfortably and to reinvest in growth. Either way, ineffective pricing makes it hard to scale.
What’s the solution?
You need to know what customers are willing to pay based on:
- How well your product solves their problem.
- How your product compares to what your competitors are offering.
Then, take your baseline pricing and compare it to your cost of production. Based on this assessment, will you be able to earn enough profit to scale? If you can’t, you need to go back and look at your operational and production costs and figure out how you can increase efficiencies, make your product more valuable for your target customers, or both.
What Market Information Do You Need to Determine Pricing?
If you don’t already know what your product is worth to your customers, you can’t expect to come up with an effective pricing strategy. Here are the questions you need to answer:
How much does your customer’s problem cost them?
Look at time spent, hard revenue, and operating efficiencies. Once you’ve evaluated all these factors, add up the costs of their problem. Then set your price here or slightly lower. You can gather this information from meetings with early customers and potential customers and by sending surveys out to your market.
What are they willing to pay for your solution?
Ask your buyers what they value the most. Accuracy, reliability, intuitive design, low cost, depth of features — what would entice them to buy? Find out at what point they’re averse to the price. If they aren’t comfortable with your price, ask why.
By having open-ended conversations with early customers, you'll gather the insights you need to scale successfully. When you know the specific reasons potential customers may hesitate with your pricing structure, and what would make your product more valuable to them, you can go back and address those issues with your product or your sales process.
What are they already paying for similar products on the market?
If your product mirrors a solution your competitor already has on the market and that business is comfortably earning a profit with its current pricing structure, use it as your pricing baseline. If your product isn’t like anything on the market, look at what your customers are paying for other solutions that are in the same category as what you offer.
Where does your product fit into the market?
In addition to customer research, make sure you know how your product stacks up against competitor products.
- Where is your product stronger than theirs and vice versa?
- How does this impact your pricing structure?
Setting a Pricing Structure that Will Generate a Profit
Once you know your product solves your customers' problems perfectly and is priced well based on the cost of their problem and competitor price structures, look at your own costs.
Will you be able to make a high enough profit to keep your startup running and have enough to reinvest in growth?
If your profit margin is too small to be sustainable, find out how to fix it by lowering costs.
- How can your startup reduce costs without sacrificing product quality?
- What technologies can you invest in to increase efficiency?
If you’re depending on scaling to turn a profit, but you haven’t yet scaled, reevaluate your product. Don’t rely on being able to scale quickly to bring in enough revenue to keep your startup running. Instead, use the information you learned about what matters to your customers and how your product compares to competitor products to offer more value.
For example, if you learned that your customers value ease of use, improve your product's user interface or offer a product support package. Make sure you’re offering something better than what's already available and that you’re driving value that directly resonates with customer pain points.
This is how you can get pricing right for your startup. Understand how all of the different factors interact and be flexible enough to add value to your product or your processes so you have something customers will be happy to buy.