There are a number of fundamental questions in business, and one of the most fundamental ones to any business is the one of what to charge for your product?
Clearly there is not one 100% correct answer for that question as it always depends on a lot of different things. And yes, pricing is a science in itself and super hard to get right. But there are a few simple considerations to at least get you started.
They are: Cheap But Expensive, Optimum and Expensive For Good Reason.
The Cheap But Expensive option is the starter option. Yes, it will cost the customer less than the other ones, but in reality it is priced in a way to ensure, (1) you get your starting costs covered and (2) there is every incentive to upgrade to a more expensive solution.
Think of this as the small but overpriced ice cream cone that really just screams you were too cheap to get a bigger one.
The Optimum price point is where the offer makes financial sense compared to the value you’re getting as a customer. Yes, you pay, but you also have a pretty good understanding of why you are being asked to pay what you’re being asked. It can be a super hard point to reach and get right, but this is where you want to be also for the sake of customer retention.
Going back to the ice cream cone example from above this is where the ratio between price and the scoops of ice, you get makes sense, and where you think the value is good enough that you also with a happy heart buy for your friends and family.
The final price point – the Expensive For Good Reason – is the where customers demands more of you, and you basically say “Ok, but it’s going to cost you then”.
This is a scary point for startups because it’s usually here where pilot customers, who haven’t really paid that much (if anything), and which the startup needs to prove its case to investors, reside; putting huge demands on the team for promised service, support and updates for very little if any return.
This is the price point where it’s ok to be greedy as a startup and consider that if a customer is asking too much, you can do the same in terms of asking for more money. Yes, you risk losing the customer, but if it was essentially making a loss, you’re in 99,5 % of all cases better off without it anyway.
At the ice cream vendor this is where you as a customer just want an obscene amount of ice cream in your cone, and you’re just billed accordingly. A totally fair exchange of value.
So in summary: Getting pricing right is super, super hard, but if you have more price points than one, you will want 3 price points:
A low price point that covers as much of your cost as possible and provides a clear upgrade incentive,
A middle one that scales well (“Most Popular Option”, as it’s often called),
And one for special requirements, where you basically ensure you get very well compensated for going out of your way to satisfy a very needy customer with their special needs – without getting distracted from your strategy and roadmap to support it.
(Photo by Angèle Kamp on Unsplash)