Why Startups Need To Focus On Pricing More Than They Think

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TL:DR

  • Your pricing is your startup’s hidden weapon to growth. 
  • Pricing enhances sales outcomes (read: revenue and profit). 
  • Your pricing will impact all parts of your startup from fundraising to finance, sales and marketing to development, so it’s vital to get this right now. 

Startups are increasingly under pressure to be not only product innovators, but to be sustainable businesses that can one day reach its profit potential. Yet many startups fall short of their potential because they have not focused time on their pricing – the critical component to their business model and sales. 

This has created a disconnect with how startups market to customers, what customers to market to, what elements of the product drive willingness-to-pay (or not), and how their pricing strategy will set their business on the right financial trajectory to help raise external capital to turbo-charge growth. 

Here are five reasons why startups need to focus more on pricing. 

 

Pricing power gives you added market power, which makes you desirable to investors, and makes your company more valuable. 

You created a product customers love. Through pilots, tests and real-life customers you have concluded you have product-market-fit, right? 

Yes, in part. The other part to this critical equation is whether you have willingness-to-pay for the product you’ve created, which is too often the missing component to the product-market-fit equation. By determining not only willingness-to-pay, but more importantly the pricing needed to establish and grow willingness-to-pay, you’ve enhanced your desirability for investors because not only have you checked off the product innovation and scale boxes, but you’ve also checked off the critical “can this be an actual business?” box. 

 

Pricing enables your business to improve cash flow, and it costs less to do than through traditional volume-based activities 

Pricing plays a critical part to accelerating revenue traction and trajectory, yet too many startups under-utilize this growth lever. Your ability to design and execute better pricing, will not only improve cash flow at little to no cost, but will improve the growth potential of volume-driven sales activities where so much of your startups growth capital is going towards. Put another way, with better pricing – model and level – you can get more for each hard earned sale and customer won. This helps improve cash flow because you were able to price better, in addition to capital and time spent winning customers.   

 

Knowing your product’s willingness-to-pay is a direct indicator of what customers care about, and ways to your product better to enhance customer demand. 

There is no greater source of product validation than when customer wants to pay for your product to have the product in their lives. This is critical for a startup that wants to build a viable business. Building a product without understanding willingness-to-pay, is a huge risk not only for monetization but also the development of the product. 

Focusing on pricing, means you know your customer better helping gain an edge on competitors.

Truth is most competitors don’t work on pricing. This means there is a vital insight missing when they invest in marketing and sales. Knowing your customers across all dimensions – including willingness-to-pay – helps you to engage, active and retain customers better giving you an advantage most competitors won’t utilize. 

There is such a thing as bad sales, and it usually includes poor pricing 

No sale is closed without a price (even when free). So when you win a hard earned sale (and for early stage startups, a potentially expensive sale), poor pricing means you’ve left money on the table for no reason than because you didn’t know it was there. For many sales is a volume/unit discussion, and that can get expensive very quickly. By balancing sales efforts with a focusing on pricing, you’ll get more mileage out of each sale – and this is eveb before any work is done “optimizing” pricing. 

 

5 Practical Steps Your Company Can Take Today

1. Weekly price reviews early on

Yes there is a lot for a startup to do in a week, but pricing must be one of the top activities and its starts with ensuring pricing is on your weekly agenda. These weekly reviews is more than understanding what are current prices. These weekly reviews are an opportunity to get all key people on the team together, aligned on the same strategy. This is also an opportunity to let everyone’s opinions to be heard. 

Pricing is a common bond between the different functional groups – finance, sales, marketing, product – so when anything changes in the pricing world, it affects all groups. These reviews not only identify friction points and conflicting views, but is an opportunity to create solutions. 

 

2. Create a pricing informational data bank  Make pricing the source of customer and market data ingestion.

Pricing is a process not an output. This means pricing needs to ingest, assess, and make decisions on information. Creating an information data bank collects data and insights from all teams from senior leaders to sales and marketing. The information data bank also documents information on how pricing decisions are made and why. 

This allows the team to know who was involved, what the thinking was at the time the decision was made, and what information was used to form the decision. This is not for audit purposes, but is also an evolving record for new team members to quickly decipher the company’s pricing philosophy and to identify ways to enhance pricing.  

 

3. Celebrate small wins – Pricing is iterative 

A startup’s pricing will change numerous times during its first few years. This can be due to changes in the product and range, competitive pressures, internal decision making, etc. What this means is pricing is evolutionary, rather than static; a truth the best and most disruptive companies understand. This makes it all the more important to recognize even the “small” pricing wins. 

This can be the increased revenue from a new pricing model launched for a specific customer sub-segment. It can be improved customer retention through the discount program for highly loyal customers. What is important to celebrate the efforts made to improve the company’s growth using pricing. 

 

4. Celebrate consistency and price discipline 

For many startups, the question of pricing quantitative and about what models to use. What is underestimated is the discipline required to extract the real benefits of great pricing. This is ensuring pricing reviews don’t happen once every three years. This means process-driven decision-making. This means defending your pricing because you know it’s aligned to willingness-to-pay. 

One of the hardest parts of pricing isn’t the modeling, but it’s the work and psychological hurdles startup executives face when having to make a pricing decision. The best models can say needs to be x or y, but it’s the leader that must decide, execute, and manage that decision. 

 

5. Encourage pricing creativity

A common question is “what is pricing “best practice” within an industry?” There are industry trends in terms of the types of models and levels used. But startups aren’t in the business of being like everyone else – they are in the business of solving problems that others are not addressing. This philosophy extends through to the startup’s pricing. 

Whether desired or not, a startup’s pricing is part of the brand and identity. So encourage the team to think of creative solutions to how the company can and should price. The one caveat is any business case that is made for new pricing ideas are backed by research and testing. 

 

Final Thoughts

All startups understand they need to price – especially when they are trying to make a sale and accelerate revenue. What can get overlooked is the need to focus on pricing, and the impact it has on all facets of the business – from raising capital to marketing and branding. So it’s vital to start on the work of pricing and making pricing literacy a core competency of your startup. 

Start by learning what you need to know to form the best pricing decisions – strategic and tactical. Start by aligning the team around a unified pricing strategy. Start by integrating pricing during the weekly standups. Taking these first steps will help you get on your way to improving how to think more strategically on the pricing process and objectives; ultimately driving the most impactful decisions.

 


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When is the Right Time to Work on Pricing?

Maximizing time is engrained in the DNA of business leaders and entrepreneurs. Time is one of their most precious resources. So it’s not surprising entrepreneurs and business leaders look to improve how they use their time and results achieved.

When it comes to pricing, finding the ‘right’ time to get started is one of the most common questions asked. No one wants to waste time on low-impact activities.

So when is the right time to work on pricing? The answer is now.

Surprising? Shouldn’t be. Pricing is a material opportunity to help your company grow and thrive. It impacts growth from revenue and profits to customer acquisition and retention.

There are many reasons why pricing is deprioritized or tabled. Not enough time. Not enough resources. Don’t know where to start. The list goes on.

If you have this list consider this fact: the best companies are awesome at pricing. Disruptors from Amazon, Apple and Netflix to more traditional companies like Wal-Mart, Starbucks and GE are dedicated to pricing. These companies made the conscious decision to be great at pricing.

 

“The best time to start working on your pricing is now.”

 

If you’re not working on pricing (or have the urgency), there’s a good chance a few of the following are happening at your company right now:

  • No one really knows how to build your prices. Worse it’s a guess.
  • Competitors effectively set your prices when you ‘borrow’ their prices.
  • Your prices don’t reflect the value you believe your product delivers.
  • Your customer insight doesn’t translate to building your prices.
  • If a competitor introduces or changes prices, your team doesn’t have a plan of action.
  • You’re leaving money (and revenue growth) on the table.
  • If you’re not building pricing capabilities, you’re forfeiting a powerful growth tool.

Nothing on this list is great. Definitely not for a company looking to grow and build a world-class company. This doesn’t mean you can’t start on high-impact pricing work now. Let me offer some thoughts on how to make your pricing plan more productive.

 

Be Realistic: Set the Right Expectations

Pricing is hard and takes work; anything worth doing is. So if you’re asking the question of when to start, it probably means you and your company hasn’t worked on it for a while (if at all). That’s ok.

Instead of thinking of when to work on pricing in black or white terms – now vs. later – it is more helpful to think of in degrees and iterations. Like training at the gym, pricing is done in whole or in targeted sections. The key to results is a clear goal or objective, structured plan, and consistency in each activity. Your pricing plan should be no different.

Chances are your company doesn’t have the bandwidth to start a large price management project. Most Fortune 500 companies don’t either so you’re in good company. What can derail companies new to pricing is an overextended scope. While I love the ambition, sometimes there isn’t enough time, attention or knowledge (yet). Know what your pricing ‘win’ will look like and go after it.

 

Status Check: Identify Where You Are and What You Need

A common way companies approach pricing is assessing whether or not they have a price and does the company believes the price is ‘right’. This only scratches the surface.

An alternative to the simple binary view of pricing is to assess status, requirements and next steps based on the stage of your product or service.

If you’re still developing a product, chances are there is no price. Now is the time to build the building blocks of the price – from the level to the strategy. This requires insights about the customer, your company’s goals and requirements and the market and competition. The process also yields important product development implications. Pricing is a bridge between products and its impact on commercial results and customer experience.

If your product has launched or is ready for an update/refresh, the focus shifts to optimization and iteration. What have we learned about customers, competitors and the market? How will updated or new pricing be received? What pricing tests or trials have been developed?

I speak often about pricing questions and one of the reasons is it changes the mindset for what needs to happen next. The number of steps to a pricing decision is decreased, and for time constrained entrepreneurs and companies, this is critical.

 

Your X-factor: Leadership

Danny Meyer is one of America’s leading restaurateurs and CEO of Union Square Hospitality Group (USHG). Through USHG, Meyer has created an impressive portfolio of restaurants including the world renowned Eleven Madison Park to the global burger chain Shake Shack.

In 2015, Meyer introduced a new program call “Hospitality Included”, which eliminated tipping from all USHG restaurants. The program was designed to eliminate wage disparity found in restaurants between non-tipped back-of-house (cooks) and tipped front-of-house (e.g. waiters).

The greatest burden of Hospitality Included would fall on customers through higher menu prices. In an already expensive food market like New York, this could mean price increases of 20% or more.

This is a tough decision, but strategic. Meyer understood, not all restaurants and owners have the “stomach for it’, but he was going to get ahead of his competition. A restaurant’s cost structure is, according to Meyer, unsustainable, but by reworking the pricing and business model he positioned USHG to invest in people (recruiting and retention) and the business (future proofing new minimum wage increases). Through this program, he also shapes customer menu price perceptions and the user experience of dining – from how bills/checks to service expectations.

Meyer exemplifies why leadership is critical to pricing and pricing success. Pricing is hard not just on a technical level, but also operationally. One of the five-cores to what defines pricing is leadership and I talk about this every time I’m invited to give a talk, lead a workshop or teach a class. Pricing leadership takes vision and the stomach to make tough decisions that reflect the value you create and the company you want to run.

 

Final thoughts

While there may be no perfect time to start working on your pricing, there is a wrong time and that’s in the future. Pricing requires vision as well as technical and operational execution. For most, this is evolutionary. As your company grows, pricing only becomes more difficult. Pricing takes work, but the work is worth it for your company’s success, so there is no time to start than now.

 

Photo Credit: Visual Hunt


Interested in learning more?

If you or your team is interested in having a hosted session on your pricing and monetization model, please contact us at: contact@helloadvisr.com 

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