Pricing 101 for Startups

Pricing 101 for startupsMartin Reichenbach

Mail: [email protected]

Phone: +49 176 / 8035 4738

02-Dec-14 [email protected] 1

About Martin

• beActive München, Founder – www.beActive-karte.de

• becoacht, CMO

• Simon-Kucher, Senior Consultant – www.simon-kucher.com

• University of Munich, Computer Science Diploma

• Various Agencies, Online- and Email-Marketing Manager


What is pricing?


As isCeteris paribusworsening by

New profit (change)

Volume 1m

10%

2.5m (-17%)

Price 10 2m (-33%)

Variable cost 5 2.5m (-17%)

Fixed cost 2m 2.8m (-7%)

Profit 3m

Why is pricing important?Profit

Price Variable costs Volume Fixed costs( )TAKE AWAY: Price decrease have a way more serious impact than changes on any other lever!

Current situation in professional B2B

• 50% price too low • 30% price correctly • 20% price too high

Startups are worse!


Explanation: By worsening/increasing your fixed cost by 10%, the profit

margin drops by 7%

Pricing depend on market situation

- 5 -

Market penetration

Time

Goal: Critical mass: Simple proposition, aggressive price

Goal: Gain market share: Additional propositions, aggressive price

Goal: Increase market reach: Stronger differentiation

Goal: Keep customers,monetize customer base: High differentiation, multi-brands, smart pricing, loyalty models ...

Goal: Get early adopters: High prices

Mostly used by startups

02-Dec-14 [email protected]

Pricing basics – Which model to pick?Startup-related monetization models

Monetization Model Example User Value Product Complexity End User buys

Subscription model Freemium: LinkedInLimited Free Trial: Netflix

Increases with time Simple to Complex Yes or No

One-off monetization One-off-monetization: iTunes

Immediate Simple Yes

One-off monetization Money-Back-Guarantee:SEOmoz

Immediate Complex Yes

Advertising-based monetization (Product or service is free, revenue from ads and critical mass)

Facebook Increases with time Simple No

Product is free, but you pay for services (Engineering as Marketing)

Linux distributions for Enterprises

Increases with time Complex Yes or No

Razor blade model Printer vs. Ink, Razors vs. Razorblades

Increases with time Simple to Complex Yes

Portfolio / Product line pricing Large product portfolio, e.g. e-commerce Stores

Immediate Simple Yes

Feature / Menu-based pricing (Monetization mainly through add-ons)

Automotive, Enterprise Software

Increases with time Complex Yes


Pricing basics – How to determine price?Cost-plus• Price = (Fixed cost + variable cost) * (1 + Markup)• Very often used by startups selling physical goods• Retail examples: Fridges: cost plus 25 per cent / Branded clothing: cost plus 135 per cent / Jewelry: cost plus 250 per cent or

more

Competition-based pricing: • Prices are based on the current competition, e.g. average across competition• Often used for service pricing in startups and established companies

Value-based pricing• Prices are based on perceived value by the user• Rarely used in a relevant fashion by any company• Factors for Value based pricing (among others): Convenience, Brand, Fashion & Trends, Monopolies and cartels, Pure

perceived value Supply and demand

Apply discount schemes:• Volume tiers• Cumulative discount• Off-season/clearance discounts• Cash-Payment discounts vs. payment mark-ups


Ideally you will combine these three data sources in order to

come up with a meaningful price

Tips for getting your pricing right

- Choose your strategy wisely

• Apply a premium strategy if early in the market and can monetize early

• Apply a low price strategy to penetrate the market

- Aim high

• Reducing prices is easier than increasing

• To users low prices often equal low quality or service

• Avoid shocking prospects by applying new metrics e.g. price per week

• Competitive prices are rather relevant for large corporations

- Apply pricing psychology rules:

• Set up a simple portfolio:

• Silver / Gold / Platinum

• Most users are overestimating their usage, e.g. download size

• Use odd prices to stay under certain thresholds (9,99 rather than 10,00)

• Communicate discounts and user benefits clearly

• Show your prices later in the checkout process if possible

- Do customer research in order to inform your pricing

- Golden rule of B2B pricing (by Bryan Stolle)

• Perceived value (measurable benefits + discounted soft benefits) = 10x

price

• Option for B2B companies: Saved Headcount = 10x price

Early stage Later stage

- Always communicate reasons for price changes

• Price increases: What is the additional value I get? Consider price

elasticity!

• Price decreases: Why do new customers need to pay less then me?

- Consider vanishing value of products, i.e. sell-by-date or

development of alternative products

- Consider dropping products or customers if unprofitable

- B2B specifics

• Use one general pricing sheet

• Enable sales by pre-defining a deal corridor → define starting/list price,

target price (e.g. one their bonus is based upon), floor price


Further readinghttp://leanstartup.pbworks.com/w/page/15765232/Examples%20of%20Pricing%20Pages

http://www.startupdonut.co.uk/startup/financing-a-business/pricing/price-your-product-or-service


Pricing 101 for Startups

Marketing

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