A few months ago – before COVID-19 and travel was still something we did – I was in New York City in a conference room of a major financial institution with investors and their portfolio companies.
Unlike what you imagine in the traditional Wall Street boardroom of suits, we had tech startup founders in sneakers, hoodies (yes still wearing those), and jeans. The purpose of the meeting was to work with these founders through a series of targeted workshops to build their growth plans and bring in experts across different fields to help.
I was there to talk about pricing and monetization.
One of the investor partners asked a great question, “How would you do pricing for your first 10 customers?”.
This was a great question because for many founders, pricing is a white sheet of paper. So much time was spent on the product and finding potential customers that when the time came to share prices there is confusion.
So what was my response?
Pricing Strategy For Your First 10 Customers
Price for learning versus setting.
If you haven’t worked on your pricing before launching or prospect meetings, the reality is your pricing is going to lack direction or foundation.
Your first customers are about helping you to learn about the dimensions of your pricing rather than to strictly set prices.
Most early-stage companies we speak to do not know what really drives value for their customers (they don’t have any). They also don’t know what drives willingness-to-pay (haven’t done any pricing work).
In the absence of these inputs, the early customers should be used to learn what value drivers resonate with clients – what do they care about and want to continue to talk to your company about.
It’s important to clarify that a value driver IS NOT a feature. In the words of Peter Drucker, “No one buys features, they buy the benefits these features derive”.
When we run workshops with founders, we run a value-driver exercise. In those exercises, founders generally come up with 3 or 4 value drivers – why a prospective customer would want to buy their product. It was rare for founders to come up with more. This continues to surprise us. At the same time if they have not spent the time working on pricing it is also not shocking.
This is why these first customers are to test hypotheses on what drives value, the relative value of each, and what potential prices can look like.
It is important to know that these value drivers are how you justify and defend your pricing. The less confidence you have in this, the more difficult it is to defend your pricing.
Price based on clear objectives
While many launch products or go into the first customer meetings with a desire to “know” their prices, what becomes apparent is how unclear we are about what we’re trying to achieve with our pricing.
You might be thinking, “That’s silly. The goal is to close the sale.”
Anyone who’s done sales well knows there is such a thing as a bad sale. Blanket goals can be dangerous. Think twice for anyone advising you to take any deal – the net value of that deal can cost you more at the end than the trophy traction win.
In actuality, these first customers – as appreciative as you are for their leap of faith they have in you – is not what makes or breaks your business.
Those first few customers can be about building goals:
- A clear sales pitch to get to value and pricing.
- It can indeed be about acquiring a new customer irrespective of who they are and how they perceive your product and value.
- More specifically it can be about segmenting customers. testing the hypothesis that these customers are the right customers for the product and prices presented, and there are 1,000 more if that is true.
- Sell against the right packages that are defendable based on clear value drivers.
- Secure the highest revenue / average order value.
- Price to the longest customer commitment (e.g. 3 months, 1 year, 3 years)
- …
Knowing what you are trying to achieve in these first few customers is vital because it will set the tone for the next set of customers you engage, what you offer them, how you price them, and how you defend your value (read = price).
Price for outsized value
One of the common mistakes we see with early-stage companies is to under-price… by a lot.
“The No.1 theme with our companies when they are struggling is they are not charging enough for their product.”
Marc Andreessen, Co-Founder Andreessen-Horowitz
Part of the reason young companies underprice is they have not done any pricing work, so there is little confidence and defendability for the prices they present to customers.
While it’s understandable that the early prices are lower than they should be (or could be), the real danger is that this often is not corrected. That is potentially revenue and profit on the table for no other reason than we did not put in the work.
When pricing for the early customers, look to price for outsized value, which means purposely pricing at the upper bounds of what you were going to present.
Why?
For one, you created this product because it uniquely solves a problem or needs in this world. It is by definition different. It should be worth more.
Second, there is a good chance you used competitors prices as a reference and priced around those products. Assuming your customers actually use those competitors as a reference, by pricing near competitors takes away potential differentiation you can create. If differentiation is the strategy, this is a lost opportunity that will require effort to correct in the future.
Finally, changing prices is easier at the early stages before your brand, reputation, and value proposition is established. Your price presentation is your big stage moment to say this is what the product is worth and why.
All startup founders pitching investors do this all the time.
It is a lot harder to increase prices than to drop prices. Price changes require discipline. Price changes also require collecting and analyzing your data. Even then, it is hard to do. We speak from experience.
The prices you give your first 10 (or 100) customers will most likely not be your pricing in the future for your next 10,000 customers.
Price for relationships rather than revenue
Your initial set of customers are taking a leap of faith in you and your product. That’s a valuable relationship and potential evangelist for your product and brand.
That is worth something, and something more than revenue for any early-stage company.
That can mean pricing your product at $0, or free for a period of time.
Like personal and professional relationships, not all are the same. So if you’re pricing for relationships then it’s important to identify the difference between each segment.
If you are pricing for relationships, then ensure you set up fences. Customers who do not fall into this special early customer relationship bucket should not get the same offer. When the two mixes it can muddy the value on offer. Think of these early offers like your “VIP cards” – they should be special.
Price for the future
While the focus of this approach is on the initial set of customers, there must be a clear focus on the future of your pricing.
What you offer today should not be what is offered in the future. These first customers should be an opportunity to learn and refine.
This should also be a stark reminder to work on your pricing in greater depth.
Many founders we speak to have won their initial set of customers with pricing “that worked”. But what “works” eventually led to more questions: How to price different customer segments? How to price new products or upgrades to existing customers?
Inevitably the lack of knowledge and confidence that should come from data-driven decisions, leads to revenue and profit left on the table.
Founders need to be prepared – and must get started early and often.
Final Thoughts
Winning your first customers is scary and nerve-wracking. You want and need those customers. This is important for the validation for your product and company. You want this also for the revenue.
This feeling is very emotionally-charged, and making pricing decisions in this mindset can lose great opportunities to learn today and build for the future.
One of the biggest missed opportunities when pricing for early customers is what was not learned. Too many founders walk away not learning what to do with pricing – strategically and tactically – for future customers.
When trying to accelerate revenue traction, this lost learning and structured approach forces founders to work harder for similar – and sometimes subpar – outcomes.
The implications stretch into fundraising.
Revenue traction is an important part of raising capital, and follow-on rounds. Looking at the “survival rate” of companies going to later rounds of fundraising:
- 48% of startups who’ve raised a Seed round go on to a Series A funding round (~ $1M+).
- Of Series A startups, only, 38% make it to the next round of funding.
One of the challenges in moving on is the business model – where pricing plays a critical role – that makes the company increasingly unsustainable.
Use the opportunity with your first customers to test your core assumptions. Who are your target customers? What (really) drives value in your product and offer? Most importantly, how does value influence willingness to pay? This can pay huge dividends in the long run.
How did you approach pricing for your first 10 customers? What did you do differently than what we recommend? Let us know what you think!
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