There is no innovation without experimentation.
The daily emergence of companies with exciting, new ideas and products can lead us to forget that innovation takes work.
A lot of work.
“When I have finally decided that a result is worth getting, I go ahead on it and make trial after trial until it comes.” – Thomas Edison
Behind every new and inventive product that comes into the market is a team of people who have spent hours and hours brainstorming, developing, and experimenting. So, it is clear that building a startup, especially a successful startup, is filled with experiments.
In fact, experimentation doesn’t just stop there. The most successful companies experiment constantly with everything, including: the team, product, beachhead market, customers, marketing approach, investment / fundraising, etc. They never let themselves get complacent and, more than anything, they are not afraid of failure.
However, one area in particular that most startups are afraid to experiment with is pricing.
Challenges startups face mixing experimentation and pricing
There are many reasons for this.
Some founders lack a clear pricing strategy or philosophy to begin with, so they do not have much to experiment with in the first place. Others are afraid of upsetting and losing their customers and/or users, who are already accustomed to their initial pricing. Sometimes, founders simply do not know what to experiment with or how to experiment. At HelloAdvisr, we have also heard founders explain that they are not ready to “optimize” for pricing, when they could be learning where their value is actually derived and validated by the price paid.
Regardless of the exact reason, there is no doubt that we have noticed startups express more hesitation towards experimenting with pricing as opposed to anything else. But, ignoring your pricing when you experiment and innovate is unwise, especially considering just how influential pricing can be to a startup’s long-term growth and success.
Why startups need to get experimental with pricing
While startups have learned about the “Lean Startup” and perhaps even the Lean methodology, it has not been rigorously implemented. As a result, this leads to “waste” and bad information that founders cannot make decisions on. Furthermore, in the long term, this type of approach creates bad habits for the team and its capabilities by setting the precedent for inefficient and lengthy processes. Understandably, it can be intimidating to experiment with pricing specifically, but in the long run, it is important to embrace change and avoid incurring sunk costs because of your refusal to do so.
How to get started experimenting with pricing
Thankfully, there are strategies you can implement to effectively change your prices so that you can simultaneously experience commercial benefits while ensuring relationships with your existing and prospective customers are strengthened.
Experiment on your pricing strategy
You can first try experimenting with your pricing strategy itself. This depends on the strategic outcomes you and your company want from your pricing. Do you want to present premium value or be an early adopter? Do you want higher value customers, larger contract sizes, and faster conversion rates? All of this depends on how you construct and design your pricing strategy. So, you can start by looking at simple focus groups of internal champions, which include advisors, investors, and teammates. Or, you can even just create focus groups of specific customers. These focus groups can help you understand how certain people respond to different pricing strategies and allow you to determine which one best suits your purposes.
Experiment on your value proposition
You can also experiment on the value proposition as it relates to pricing. Here, you can use what we call our “$10 Test” to assess the value proposition. So, you should first long-list what you believe drives value. Then, pick out and mark the value drivers that specifically increase willingness to pay. Finally, you want to ask potential or actual customers: If given $10 to spend on any of those value drivers of their choice, how would they spend it? Would they spend $10 on one thing or $1 across 10 different things? Doing this test allows you and your startup to do an initial assessment of the value proposition against money and relative value between value prop.
More measured changes to your pricing also allow you to be thoughtful and methodical since you can ease your customers in while giving you enough time to create more value for them. A prominent example is Google changing the calculation of storage consumption on their Google Drive product to include their productivity products (e.g. Docs, Slides, Sheets) in late 2020. They incorporated this change by rolling it out over a 14-month period so that users could learn and adjust.
Another advantage to spacing out any price changes you intend to make is that you can effectively use each small change as price tests and gauge how various customer segments react to them.
Experiment on your customer rings
Finally, you can experiment on your customer rings. Between experimenting on your pricing strategy and your value proposition, it is possible that you may lose some customers. In general, losing customers is tough but this can be a blessing in disguise.
Because you always want to make sure you’re serving the right customers that find value in your product and are willing to pay for it. By experimenting with your customer rings. can help you recalibrate your customer base and retain the right ones. The more price sensitive customers were likely hard to maintain as it is, requiring extra expenses and more customer support than should be necessary.
One way to start experimenting against your customer rings is selective price testing of products and services to different customer cohorts. . For instance, Starbucks constantly changes prices to select menu items (i.e. drip coffees, espresso drinks, food, etc.), which allows them to measure which customer segment and retail locations are affected by such changes. Another notable example is Netflix and how they have chosen to change prices on certain plans they offer. While they have changed and increased the pricing of their standard and premium plans, their lowest level basic plan has remained the same. Knowing your customer segments and how they would react to such experimentation is important so that such changes are seen as acceptable.
Final thoughts
In conclusion, it is clear that startups should embrace experimentation rather than shy away from it, especially when it comes to pricing. Such experimentation is not only important to maximize the growth and success of your company but also to innovate and keep up with the shifting market. While many can be hesitant to incorporate such changes in fear of upsetting their loyal customers, it is much easier to do so as long as you focus on your customers throughout and keep them informed.
As long as you are able to defend your value and communicate the benefits to your customer base, such experimentation should really be mutually beneficial between you and your customers. Every successful company goes through this process of trial and error to achieve innovation, so it is important for you to realize that the same applies to you and your pricing. Without change, you may not realize your full potential and experience the maximum level of growth and success that your company is certainly capable of achieving.
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