How Should You Price Your Product?

Startup pricing is both art and science. Many companies have 5, 10, even 20 iterations.

As you grow, build out your offering, and the market develops, your pricing model will evolve.

So where do you begin? What should you anchor on when thinking about the right pricing for your company, product, and market?

Here are 4 key considerations to nail your startup pricing strategy!

These principles will guide you on Day 1, Day 1000, and through all the pricing mistakes learnings along the way.

4 Key Considerations For Great Pricing

1. Alignment With Customer Value

• What is your customer measured on? What do they care about and does your pricing show understanding of that?
• As customers get more value, do you make more money?

Test It

Imagine your largest customer is so happy they want to increase their usage by 10x. Yay! What would their total spend look like? What are the margins for you?

Another Fun Thought Experiment

I heard this pricing framework recently and loved it!

IBM expects to pay $1 million for a B2B software. If IBM buys your product, how will they pay $1 million?

(Sorry, IBM. Secret’s out 😉)

2. Simplicity

• Is the pricing easy for customers to understand?
• Is pricing easy to implement and track within the app?
• Is pricing predictable (e.g. not hugely variable or requiring custom calculations) for you and customers?
• Can customers put it on a credit card, charged monthly? (Avoid lawyers and procurement!)
• Is it easy to manage on your end with minimal invoicing, collections, or variation from client to client?  

Simplicity is hard but worth it. It’s better to leave a little money on the table than get bogged down with administration and management of complicated pricing. Simplicity speeds up the sales cycle too!

3. Cost To You (aka COGS - Cost of Goods Sold)

• What are your costs? What are the largest technical expenses? Any other costs to consider like customer support reps needed?
• Does the price increase as your costs increase?

Here’s what you don’t want: a customer paying $100/mo with hosting fees of $1000/mo. Or customer paying $100/mo that needs 3 support reps to manage their tickets. Sooooo, yeah. Avoid stuff like that.

4. Industry Norms

• How are customers used to thinking about pricing for similar products?
• What budget line items already exist?

New Kid #ProTip

If you are on the forefront of innovation or creating a new market, it may help to align with an established budget item to start out.

We saw this at Pardot. Marketers understood “email marketing” costs before they had a “marketing automation” budget. To start, pricing was based around monthly emails sent, just like an email marketing tool.

Another great example comes from the world of robotic mowers. Lawn care companies are used to paying for workers during mowing season but not accustomed to paying for a year-round Saas software. Voila! The “robotic worker” line item that is billed during mowing season only.

Can Pricing Be Perfect?

Pricing is complicated and requires thoughtful tradeoffs and balance. There’s a reason large software companies have whole departments for pricing strategy!

The right pricing today will probably be wildly different than the right pricing next year. Like with all things at startups, pricing is a journey.

Test, learn, and improve as you go!