How to Price Your Startup’s Product or Service

How to Price Your Startup's Product or Service

A CEO of a startup recently asked me for advice on how to set pricing for the company’s B2B Software-as-a-Service (SaaS) solution that is targeted at streamlining the bidding and procurement process.  I am not a pricing expert, so thankfully the CEO gave me a day to put together and summarize my thoughts before our meeting.  Below are the discussion points that I presented to her for consideration.

The story.  What story are you trying to tell with your pricing?  Is your story about affordability?  Or, is your story about luxury?  You can price your SaaS solution for $10 per user per month or $50 per user per month.  It is the same SaaS solution.  However, one story is about value and the other story is about enterprise-class.  If you are in the middle of the cost spectrum, you are not telling a story with price, so you will need to focus on another key attribute.

Market pricing.  One way to determine the right price for your product or service is to ask the people who will buy it.  You can gather pricing data from customer surveys, focus groups, etc.  Or, you can describe your product or service to potential customers and ask them how much they would pay for it.  What would be a bargain price?  What would be full price?  What other factors would influence their purchasing decision (e.g., support)?

Current pricing.  What is the customer’s feedback on current pricing?  How much is current pricing an issue in closing business?  How much discounting is occuring on deals?  Does current pricing support the company’s business and financial objectives?  If customers are paying the current price without seeking discounts, the product/service is either priced too low, priced in the middle or your sellers are doing a good job of positioning value.

Competitive pricing.  How does competitive pricing compare to current pricing and market pricing?  Where is the competition in the cycle: Growth?  Mature? Decline?  Are they growing fast and keeping prices high?  If so, under-cutting is an option.  Are they passing cost-savings onto the customer?  If so, competing on price will be key.  If you cannot beat them on price can you beat them on value (and vice versa)?

Pricing must always be considered from the customer’s point-of-view.  How much it costs to make the product or service is irrelevant to the customer.  If the price is too high, they will look for substitutes.  If there are substitutes, your pricing should reflect them.  Even if your product or service is unique, remember that the buyer still has a choice – do nothing.  Good marketing helps the customer understand that your product or service has no substitutes.

All contents copyright © 2011, Josh Lowry. All rights reserved.


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