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When thinking about the creation and development of a product or service, we often focus on the pricing component that seems the most important to success — the “what”. On the surface it seems like this is the most important thing that one should think about with pricing, so it is easy to fall into the trap of fixating on “what is the price point for our product?”

This is certainly important; but when it comes to pricing, there are multiple components that need to be researched and developed in order to design pricing successfully. Companies need to consider their pricing multi-dimensionally or what we call the 5 W’s of Pricing.

The 5 W’s of Pricing provides a framework for companies to assess their price design strategically and tactically. This framework can also offer companies an early step to building a decision-making process. This is even more powerful when you consider less than 30% of new ventures have a pricing process. 

As you go from the “why” to the “what”, the decisions made become increasingly more visible to your user or customer. The “why” is what your company thinks about and sees and the “what” is what your customer ultimately sees. 

Let’s start with the “Why”. 

The “Why”

To start thinking about a pricing strategy, you need to figure out the reason behind your composition and structure. Why do we need to make these pricing decisions?

 It is critical to start here, because this will influence not only how you price, but to what customers and at what price. The “Why” is also important because it really pushes you and your team to think about the decisions you’re making in the context of your vision and overall business strategy. Less thoughtful approaches can lead to lots of filler with little content that’s actually valuable to pricing decisions you need to make. 

Question for you and your team to consider — what is your goal and what do you want your pricing to help you to accomplish? When thinking about how you want to structure your pricing decisions, will lead to successfully moving forward into other areas of your business. 

The “Who”

Knowing who your target audience is and trying to sell to is extremely important. 

Picture this. You put in years developing something that you are finally ready to offer to the world. Although you probably spent a considerable amount of time researching how to market and distribute, there is a good chance that you didn’t connect who these people are and how your product resonates with them from a value and pricing standpoint. 

We find too often that one of the reasons why companies discover there is no market need for their product, is yes partly due to the product, but also because the product failed the “worth it” test: is the product right for this customer at this price and offer?  

Knowing who exactly your target audience is and ensuring they are aligned to your value (which includes price) creates loyal customers. More companies need to focus on researching and surveying their customer base — we found that only 47% of companies stated that they ran a price test or pilot with customers. 

In order to address this, you need to validate what you believe to be true about your customers which can include online surveys, focus groups, and in-field testing. 

The “Where”

Now we need to consider what our channels are for pricing, engagement, and distribution. 

In other words, where will your product be sold? Do you want to sell across multiple channels, directly or indirectly, internationally, and overall what would be the optimal way to sell your product? Where will your pricing be displayed (if at all) and on what platforms do you plan on connecting with your customer base?

Mapping out the “why” and the “who” leads to an easier transition to finding out the “where”.

If we already know the meaning behind our actions and our customer base, then there is already a strong foundation to pave the way for where our prices live and how. 

The message being sent has to be accessible and practical to the audience you’re trying to reach.

The “When”

The “when” is focused on the timing of monetization and the influence of pricing. This is the stage where you need to figure out the timing of your pricing decisions. 

For example, you can offer a service that can be paid for monthly or annually depending on the needs of the customer and what they are willing to pay for. In order to try to bring in new customers, you can also offer a free 14 day trial. 

These are not only structural mechanics, but also the types of “when” decisions to be considered for your customers. 

The “What”

At last we have reached the “what”. At this point you will have found that there is no one way to decode pricing. The “what” can be influenced materially when accounting for the other W’s.  

One consideration to think about with the “what” is to think if you want to offer just one price point or multiple prices. This can be housed in tiers, but also can be designed for timing and for different customer types. 

Other consideration when thinking about multiple prices, is also the pricing distance between the prices. Are your prices really “simple” because they are exactly $10 apart, or do your customers find this irrelevant to their decision-making because prices are divided into payments? 

Every price difference needs to be considered when planning out the “what”. Each level of pricing and all additional components need to be assessed and determined at this stage. 

Final Thoughts

Pricing is a complex journey, but once you understand the 5 W’s of Pricing, it brings it down to a level that is more manageable. Using a structured framework like the 5 W’s of Pricing can improve your pricing decisions, and make a material difference in the early traction and success for your business. 

Take it from companies that are successful — pricing is strategic and goal oriented. Researching and testing at each level takes time.

We all need to get into the mindset of working smarter not harder. Pricing is challenging but once you’ve mapped out each step and your objectives, most of the hard work has already been completed.

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The last few months have been spent building a new product. Tireless days, nights and weekends, bug-fixing, user tests, delays, the list goes on. 

The big launch day is coming and there is still one thing that needs to get done: Pricing.

Now things get tricky. Why? Because a pricing process is not something many new ventures have ready. In one of our studies on startup pricing, we found that less than 30% of new ventures have a pricing process. When the CEO is the primary decision-maker, even less have a formal process (see chart below). 

Even if you’ve priced a product before, you’ll often find there is a lot of information required, and potential team friction getting to a decision. 

Here’s what the typical process looks like: 

1. Trigger: Founder / CEO questions, “We need to make a decision on the price. Bring back recommendations.”. *Nods from the team*
2. Research: Team does online research collecting prices from “similar” companies, products, or direct competitors. Team collects more information to see what other pricing models and approaches are out there they might not have considered. 
3. Assess: Leadership team narrows down the list of pricing models to select the one they want to go with. Will narrow the range of price points/level that is relatively close to the competitors found in the online research. 
4. Test: If the leadership team is still not confident with the pricing and is looking for more validations, it will run tests. This usually entails some “trial and error price tests” to estimate customer demand. (In our research less than half of companies actually run price tests or trials ahead of a new product launch). 
5. Decide: Pricing decision made. New is pricing updated on the website and other sales and marketing assets. 

Does this sound familiar? (for your reference, a typical pricing process will involve at least 20 steps, involving at least 4 functional teams or leads). 

Teams are trying to increase confidence in their pricing decision, but often falling short. Pricing is often cited as one of the top reasons why startups and new ventures fail.

What’s the problem? 

It starts by fixing the input collection – your pricing inventory.

Build Your Pricing Inventory 

Rather than working on your pricing in a vacuum, start by getting your pricing inventory right. 

Designing better pricing requires inputs – a lot of inputs. Making sure you have an inventory of what you have, don’t have but can get, and don’t have and won’t be able to get, will help to save time and focus attention. 

A pricing inventory will establish what you are basing pricing decisions on, but managing potential bias and corrections required to move forward. If you are not checking off a majority of these boxes, then you need to assess how pricing decisions are made and whether pricing is supporting your growth strategy. 

Your pricing strategy

No strategy means there is a lack of clarity of where you’re trying to go. It means you’re not sure what objectives you want your pricing decisions to help you achieve. Don’t guess.

Spend the time to figure out what you want pricing to help you achieve. This may be some of the most important time you spend on your pricing and your broader growth strategy. 

Your market

Well-prepared companies understand not only their place in the market but also the conditions that drive the market. This includes:

Distribution channels, business models, and suppliers, and vendors.

Geographical and seasonal dynamics. 

Cultural differences – where applicable – within the market. 

And more…

Your competition

There are many levels to competitive intel for pricing, so awareness of what drives pricing strategy and models for competitors is particularly valuable.

On the most basic level, collect competitors prices (publicly available), but rarely consider the drivers for competitor pricing.

This can include where strengths in the competitor offer sit, and how much do competitors follow the market leader’s behavior.

Equally important is the extent competitor alternatives are replacements or substitutes for your offer. 

And more…

Your customer

If you went through the process above, you saw there is sparse intel about your customer. There is so much to learn about YOUR customers to help you build prices through a segmented, value-based approach.

One of the critical customer inputs are your Customer Rings. These are micro-segments that hone in on customer’s preferences to build value-based pricing.

Customer perceptions and value drivers. 

Price sensitivity and tradeoffs. 

And more…

Your product

There is some overlap between inputs about your product – the product itself as well as the offer – and your customer, but the goal is to learn what elements of your product do customers really care about and are willing to pay for.

Product substitutes. 

Feature benefits (current and planned). 

Terms and discounts. 

And more…

The One Thing You Need To Avoid

How many of these inputs have you already collected (and collect regularly)? How many do you use to build and manage your pricing?

If the answer is very few, you’re not alone. 

To confront this challenge, it is vital you do not waste time. 

One of the biggest mistakes we see entrepreneurs make is wasting time in the pursuit of being fast and not wasting time (yes, ironic). 

Now you have a pricing inventory outlining what needs to be collected to start reframing how your company prices. More importantly, put this into action in your pricing and monetization strategy. 

The upfront time to collect, assess, and design pricing is a lot more than many anticipate. But the initial time and effort to setup pricing pay HUGE dividends – time, decision quality, and revenue impact – from launch to EOL. 

The goal is not perfect prices, but better decisions on pricing. Pricing is an on-going process for the life of your product and company.

Final Thoughts

We have spoken to hundreds of entrepreneurs and companies and too often, pricing is built on limited information – even if not directly related to their customer or product. This too often leads to misguided pricing decisions that impact revenue traction and profitability. 

When markets quickly change as we’re seeing today, companies need the flexibility to assess and adjust prices quickly.  Too often the lack of structured inputs, analytics, and management programs makes the process frustrating and do not build the confidence experience should usually yield. 

Start with this pricing inventory to see what type of information is actually being collected, and where biases in your pricing decision lie. Leaning on simply “what’s available” can lead to misguided pricing that reduces revenue and profitability potential. 

The real opportunity is what else can be done with pricing to create differentiation from competition, and also yield the business results needed to accelerate growth. 

No one will ever complain about not having to recreate the wheel, and not having confidence in the decisions you make. 

Do you have everything in our pricing inventory? What are we missing? Let us know what you think!

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• 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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Manage Change In Your Business 

Overcoming Barriers To Pricing Reviews

• Quarter 1: Pricing opportunity theme – Based on new products and objectives in the new year, what pricing opportunities can be introduced in conjunction. 
• Quarter 2: Competitiveness theme – Assess competitiveness of the company’s pricing, pricing-based competitive strengths, and weaknesses. 
• Quarter 3: Execution theme – Progress made to operationalize pricing including pricing studies and tests.
• Quarter 4: Achievement theme – Assess progress made on the pricing strategy and overall. business targets, key learnings, and areas of improvement. 

Final Thoughts

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

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