Pricing strategy – Page 3

Pricing For Your First 10 Customers

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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Managing Your Pricing Strategy In A Downturn – Your Cheat Sheet

The economic downturn brought on by the global coronavirus outbreak has forced companies to reassess their financial position, business model and pricing strategy. As businesses adapt, one of the first things to go is pricing power – having a lasting impact on current and future revenue opportunities.

Being proactive is critical during a downturn. It is critical for the company’s survivial, the team’s security, but also the longer-term opportunities and future.

Entrepreneurs are faced with unprecendented circumstances to navigate. There is much to consider and priortize. To help companies navigate the current uncertainty, we created an easy to use cheat sheet on how to manage your pricing strategy during a downturn.

You can get our free cheat-sheet here.

We will be sharing more resources in the coming days and weeks, so keep a look out on our website and social channels.

Be safe and well.

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Our New Pricing Strategy Ebook

“Where do we start?”

It’s one of the most common we get asked when companies want to start focusing in on price and how to effectively as a growth tool.

So to help business leaders get started, we created a new ebook focused on one of the most important steps of an effective pricing approach: the pricing strategy.

Our new ebook gives you a step-by-step guide to designing a high-impact pricing strategy and drive results from a smarter pricing approach. Download your free copy below.

Want to learn more?

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If you or your team is interested in learning more about rethinking how your company can grow, visit our blog for a range of articles from pricing to sales effectiveness or contact us to schedule a chat: contact@helloadvisr.com

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Know Your Value: Capture Opportunities And Manage Uncertainty In The New Year

The new year is a blank sheet of paper. Time for new goals, renewed ambitions, and more wins. People are making new health and lifestyle goals. Professionals are updating career plans and objectives. Companies and entrepreneurs are excited about opportunities – new and old – that writes the next chapter of their company’s history. Everyone has an opportunist mindset.

This optimism, unlike past years, is confronted by uncertainty and volatility in the economy and political environment as a whole. This has real consequences for companies big and small, and presents a real opportunity for companies build solid foundations to thrive in all conditions.

Navigating Uncertainty

Some investors are taking proactive steps to prepare their portfolio companies for a potential ‘winter’. For some this means preparing founders for a reality where the next round of funding – or injection of capital – will be harder to come by, or worse, not available.

“There’s a large cohort of founders who haven’t seen a down economy
and that’s a risk to the ecosystem”

– David Frankel, Managing Partner Founders Collective

For others – including several companies we have spoken to – it means strengthening the bones of the company; greater focus on financial and operational fundamentals and practices to help thrive across market conditions. This means greater focus on managing things they can influence; going from guessing to certainty. At the top of most companies’ list is capital requirements and cost management.

Companies are looking to fund-raise sooner and for more while capital remains available and the cost of capital remains low. This also means a renewed focus on managing costs including a smarter use of existing capital resources, more efficient internal processes, more effective product development, more selective hiring/recruiting decisions.

Another core element to the sustainability strategy is pricing and monetization. As much as companies focus on what goes out (e.g. costs), there is not equal time or effort spent working on and improving what comes in (e.g. revenue, profit). Knowing – not assuming or guessing – how to monetize and price products and services help to make better decisions on a core function of the company – how it makes money.

The Power of Your Price

Taking the guess work out of pricing and monetization, reduces the opportunity costs of time and lost revenue and profits, and increases focus on the activities that have impact and avoids the things that don’t.

Working on pricing is often overlooked, but is a proactive approach to build the company’s capabilities to compete and grow. Even the slightest of pricing improvements can take your company further than most imagine. In fact, impact on the bottom line is up to 3 to 6 times greater on a 1% top-line price improvement than increasing volume by 1%. Compared to a 1% decrease in variable costs, a price improvement can have more than 50% better impact to the bottom line.

Design An Inside-Out Pricing Approach

For a great chef designing a world-class restaurant, the first step isn’t to build the dish. Chefs design dishes around the vision and goals for the restaurant. They create menus and offerings that drive this vision. They work to win customer segment tastes and interests. Building effective pricing follows a similar inside-out approach. The focus is on answering key internal questions before getting to external presentation. That first step starts with strategy.

1. Define your strategy

The definition of strategy is the high-level plan to achieve one or more goals under conditions of uncertainty. We share this often but the starting point is identifying what goals pricing is intended to achieve. Does the company need to increase revenue and profitability? Does the company need to accelerate market share capture? Being clear and upfront of what you are designing your pricing for can make a huge impact on outcomes.

Reality is your company can’t do everything – most companies can’t – so prioritization and focus are vital. Much like you see in an idea funnel, the first step to developing an effective pricing strategy is creating constraints on the problem set.

Companies can also take the strategy building exercise even further by assessing resources to invest to work on pricing – money, people, time – and define goal timelines. At minimum, defining the strategy and its goals is a vital first step.

2. Identify how you’ll monetize

Once you have defined what pricing needs to achieve, the next step is to identify how you will charge for your product or service or the revenue model.

Discovering how we want to charge becomes as important than what we charge. Take for example a simple freemium pricing model. A portion of the product is offered for free, and customers who want more features or functions need to upgrade to a paid subscription of $5 per month or $60 per year. This could compare to charging customers a single one-time fee of $60 without a free component. Both can achieve the same revenue per customer for the year, but depending on the model used, can have consequences on longer-term revenue and profit opportunity, customer acquisition cost and retention, price perception, and so on.

Figuring out how to charge is not as simple as selecting a model. The best companies understand that to design the right model to charge, you have to understand your customer – who they are, what makes them uniquely your customers, and what they are willing to pay. Structured research and analysis is a vital step to successfully determining the right monetization approach for the company.

3. Set your prices

Most companies start here, but yes this is the last, not the first step, in the process. Too many companies and entrepreneurs we speak to start and end here, without recognizing what prices you charge are a result of your pricing strategy + monetization plan.

There are three main ways to price your product or service:

Cost+: Calculating the costs associated with developing and distributing the product or service, and adding an arbitrary percentage margin.
Competitor-based: Perhaps most common for companies and entrepreneurs, this approach is to research either direct or related competitors and their prices, and making pricing decisions based on competition.
Value-based: Highly research and testing driven, this approach enables companies to not only price based on willingness to pay, but can build products and marketing around customers and the things they most value and need.

But this is not all…

4. Execute

For many companies this step is the go-to-market strategy. In the pricing world, a great pricing strategy goes hand-in-hand with execution. The marketing and sales efforts is ultimately designed to reduce – if not eliminate – friction in the minds of customers when they ask “is it worth it (for this price)?”.

To begin executing on the pricing work you’ve completed, companies to start looking at:

Leadership: The company’s leaders set the tone of how pricing is designed and executed in the company.
Process: The clear steps and internal owners to manage the review, changes and implementation of pricing decisions.
Rules: Rules provide accountability and remove ambiguity on company’s pricing, and also sets restrictions on price changes such as discounting. These rules set a powerful tone on how the company will go to market and how success will be measured.

Much like the monetization step, research is a key success factor to setting prices. This requires identifying the right methodologies, work, and discipline, but will take the guess work out of the company’s pricing decisions today and in the future.

Final Thoughts

Building a strong foundation and removing decisions based on guesses help to prepare for uncertainty and proactive seize opportunities. Working on pricing is one powerful way to be proactive.

Pricing helps companies to answer important questions vital to the commercial viability and success of the company. This is important not only from a top-line perspective, but also for the company’s efficiency and effectiveness in any market conditions.

Found this article helpful?

Sharing is caring. Share this on social – super easy 1-click share buttons on the 👈 left-side of this page – or send this article to a colleague or friend who can learn something new to empower their company or hustle.

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

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How To Use Pricing As A Growth Strategy

You’ve got a great product that your customers love, a growing reputation, and team members who are passionate about what they do — yet you’re struggling to grow. Why?

Most businesses in this position would knuckle down and work harder, confident that a breakthrough is just around the corner. And it might be. But what many of these businesses don’t realize is that that breakthrough could be made today (and with potentially a lot less effort).

So, what’s the secret?

It’s your pricing strategy.

Most businesses start by setting a price that they think is about right and then leaving it to see what happens. Normally, customers are happy to buy (because it’s a good product), and so the business assumes that the price is right. Once they’ve found something that “works,” businesses tend to stick with that price, only altering it as manufacturing costs go up.

This set-it-and-forget-it mentality leaves value on the table and restricts growth. Most businesses guilty of this strategy are setting their prices too low; they receive enough to continue running but not enough to grow.

The time to focus on your pricing is now: let’s get started.

Pricing As A Growth Strategy

Designing and executing a pricing driven growth strategy requires an “inside-out” approach. By starting with your company and your growth objectives, you can set out a sustainable strategy that delivers value to your customers without compromising your growth.

Step 1: Establish Your Goals

It appears obvious, but the first step is to look at your growth goals for your company. Where do you want your business to be in one year’s time? How about in five years?

Many companies forget what it means to build goals – stretch and attainable – that reflect the ambition and new reality for your company and market. Your pricing is a vital part of this growth story because it starts to identify the levers available, how hard you want to push these levers, and the impact these decisions will have in your company’s future state (e.g. can you become profitable?).

Step 2: What Do Your Customers Value?

Your customers purchase your products or services because they provide value. Perhaps your service saves them time or provides them with access to something they can’t get anywhere else. Whatever it is, you need to figure it out — because it’s this value (and its relationship to price) that decides whether they make a purchase decision or not.

Not sure why customers value your product? Ask them!

Step 3: Determining Worth

To price correctly, you need to put a number on the value you provide your customers. This value might change depending on which customers you look at — and this might have important implications for your sales and marketing strategy.

For example, say you provide an online service that saves users an average of four hours per month on a boring and monotonous task. How much is that worth? Executives might value that time at $250 per hour. Students, on the other hand, might value their time at a fraction of that. Understanding what customer value and what drives that value is critical to determining worth — while not giving up on potential monetary opportunities.

Step 4: Evaluate Your Market

The value your competitors offer (and the prices they offer it at) may shed light on which pricing strategy will work best for you. Some industries are very “flat” with little difference in pricing between firms, while in others there is a huge difference (like the motor industry).

Your task is to consider how your value measures up against your competitors and decide what that means for how much your customers are willing to pay.

Step 5: Align Pricing and Goals

Your aim is to hit the sweet spot — a price that reflects the value your customers receive and that they’re willing to pay, and that allows your company to hit its growth goals.

Sometimes this isn’t possible, in which case you either need to revise your growth goals, improve the value you provide (and potentially increase the amount customers are willing to pay) or both. What is important is not to put pricing or growth into silos, but see where pricing can enhance goal achievement.

Step 6: Test Your Price Design

Remember when we mentioned the “set-it-and-forget-it” mentality? You’re not going to make that mistake again.

Test your pricing strategy by running trials or conduct pricing research. This can be easily achieved online by driving traffic to a sales page and then splitting the traffic so that viewers receive the same sales message but different prices. Often, the most profitable price will result from fewer sales at a higher value — but you won’t know unless you test.

Step 7: Launch, Measure, Refine, Repeat

Once you’ve completed testing, launch your pricing strategy and measure its progress. Conduct regular reviews of your pricing strategy, taking into account customer opinion, sales progress and your growth goals. This is not the responsibility of a single team member, but a core leadership topic — pricing is a reflection of the value created for customers. In addition to refining your price design, you will enable your sales and marketing teams to better design ways to defend the pricing with stronger communication, messaging and processes.

Final Thoughts

Used correctly, your pricing strategy is an incredible tool for supporting and enabling the growth of your company — but you have to have a plan. By being clear about your goals and values, evaluating your market, and implementing thorough trials and testing, you can find the ideal price, keep your customers happy and grow your business.

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

Get our latest updates and insights by subscribing to our newsletter and following us on Facebook, Twitter and LinkedIn.

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Pricing For Your First 10 Customers