Episode #0113 - Pricing advice for start-ups

Pricing College Podcast

In today’s episode, we want to explore the world of startups and I supposed at Taylor Wells we got asked or approach by quite a few startup businesses and the early stages of development with questions about pricing advice and pricing strategy and how start-ups should price. And I suppose we just really want to explore some of those ideas today and maybe just discuss some ideas.

TIME-STAMPED NOTES:

[00:00] Introduction

[03:00] What’s our advice on issues regarding pricing for start-ups?

[12:19] How can we advice start-ups in discovering value in pricing?

[16:57] Would you advice implementing various pricing strategies for start-ups?

[22:01] Pricing Advice For Start-ups: Don’t lose data. Keep learning, testing, and trialling.

Pricing Advice for Start-ups to Kick-start Their Growth

Especially quite recently. We’ve had a number of questions and inquiries from startups. And we’re talking about startups, people that are literally coming up with new business ideas. And often, it’s the first time that they’ve done that and they’re trying to launch either a new product.

Now, this could be ranging from, you know, an FMCG good product or you know even a Saas type product and you know, they come with legitimate concerns often they’ve heard the podcast and there’s thought, you know what, I never really considered any other approach to pricing, other than thinking about costs and putting a markup on the cost to give me that margin that I need to cover my costs and get revenue in through the door.

And I never really thought about value-based pricing but it really did change my viewpoint, not just on the price point, but also it gave me a new perspective on what I’m trying to do in the market, my business model, how I’m going to generate revenue, what the sources of value are that are going to help me do that and cover my cost, how I’m going to work with suppliers who my target customers are.

All these new and very important ideas came almost flooding in people’s heads after thinking about value-based pricing and, you know, we just going to explore today, you know, a little bit more about pricing for startups and a few techniques just to help people make those first few steps because it doesn’t have to be a difficult journey or long drawn-out journey, you can start pricing immediately, even though sometimes you think “God I’ve got so much else to do. I’m just going to get money through the door”, type of approach.

It’s clearly, you know, we’re not gonna go into cost-plus pricing on this podcast, but clearly for a start-up, it’s even more exacerbated.

You know, if you make one item, you know they’re your cost base is going to be higher than if you make a thousand. So, you know, as you grow in scale, do you intend to reduce prices? So, that makes no sense.

But clearly a start-up even number of issues that will make pricing more difficult: A) there is no right price for your product. At the beginning, you don’t know what a value provides to your customers you might have an idea, you might have you know obviously you’ve got your pitch deck and you’ve got your ballpark figure and your idea, your elevator pitch let’s say, you know and you thought about why you’re getting into the business and where you fit in the niche. But realistically what’s that old saying?

Everyone’s got a plan until they’re partially on the nose. I think Mike Tyson said and you know until you go out there and made customers and really get into the market you don’t really know, you look at statistics, how many companies, how many start-ups pivot?

How many really hit a niche and really make money it’s limited obviously we don’t want to put people off from starting up but you know those things have to be borne in mind and when you’re looking at pricing, that is the issue.

They are, you don’t have enough information at the beginning, there’s no saying that trying to get some customers, trying to get out there with some customers. Realistically, I don’t think the price of the beginning, we’ll get into this a bit later, but just winning customers is very important. Because then, you can explore value, it’s a value discovery process.

Almost look at it as a subsidized value discovery process where a customer is almost paying you, it may be too much, or it maybe too little, but hopefully they’re paying you and then you can explore and learn about your own business. So that’s the first thing I’d say, clearly, It’s very important to get customers on board. The second thing I say, unless you have funding and we’ll talk about, you know, series A or a large amount of funding, it is highly unlikely to have a pricing manager.

Let’s be honest. Most startups at the beginning have very limited revenue, and a good pricing manager’s salary probably will be quite expensive. So, you’re going to be doing an ad hoc, you’ll be doing it in-house. Probably the startup. The founder would be doing the pricing and so, you know how much attention you can really give the pricing at the beginning is limited.

I totally disagree with the point that, you know, people often come into the business with a really good plan.

In my experience even consulting with major corporates, medium-sized businesses, even you know, blue chip companies, often the surprising point is they don’t even have a plan when it comes to pricing or even their business strategy.

What they’ve actually got is a very flimsy outline of what they kind of want to do. Often the key question of, Why are we selling this product? How do our customers value this product? How do they perceive and value us? What are important in the eyes of our customers? How good are we at delivering what customers value? Are things that are hot, not addressed in, I would say, 98% of business strategies, even though that’s the most important questions you should be asking.

So, I would say, most startups don’t have a plan either to be fair. And really, there’s a little bit of hope and a prayer that this product, this new business is going to solve a gap in the market without actually, as Aidan said, approaching customers and seeing, you know, giving it that, you know, testing our assumptions.

Pricing Advice For Start-ups: Testing out, let’s call it a hypothesis about what we think we’ve got and how valuable that is, in the eyes of our customers.

Because essentially, if you’re going to get investment from private equity, seed investors, they’ll be asking that. I mean, because it’s the central aspect of a business, a new business model and operation system or it should be.

And if you haven’t got clear answers on that, you’re not going to get the funding and that brings me back to what I was saying before. You know, a lot of startups have come to us and even with you talking about value-based pricing, it made us think about value.

And it made us think that there was that major Gap in our business thinking, and our strategy, which has, in turn, delayed other things, not just pricing, but even you know, how we go and approach, our customers, our pitch, what do we say to them? You know, what is that compelling message?

All of these things, you know, were sort of underbaked and then have been preventing people from launching. So like Aidan was saying, let’s go back to basics.

Let’s ask and turn these questions into hypotheses and start going back and thinking about who our target market is.

Can we think about the personas of these customers, that would want to buy the products we’re trying to sell? How are we going to communicate that offer to them? How are we going to make it easy for them to buy from us? Now, these are the questions, like you’re not going to have the answers and don’t fear not having all of the answers.

When you approach your customers, the key here is to have some hypotheses in mind about what you’re doing, and what the value of the offer is, right? When you go in to speak with a customer. But then ask the questions and then listen. Listen, very very carefully to what they’re saying to you. What you will find, is that some customers that you’re talking to are really not your target market.

Even though you thought they were whereas other people really are potentially changing your viewpoint on your initial business model and plan and then iterating from there. This is the fundamental aspect of value-based pricing and as Aidan mentioned we call it a value discovery process, but really it’s essential. It’s an activity that leads to profitable revenue growth and it’s one that’s often ignored and skipped but it’s the central aspect of any pricing model and of any business strategy.

Pricing Advice For Start-ups: Let’s be honest at the beginning.

For anyone who’s ever started a business, every single interaction with a customer, feels like life and death. You know, you stressed about them.

You dig into too much, you know, all those are those interactions statistically valid, you know, is it over time when you scale up your business, you know, will that apply across a larger number of customers? Those questions have to be decided. I suppose at the beginning you have to have a ballpark figure.

As to what value you’re providing, you know, are you aiming to be the cheapest in the market and undercut traditional operators because of your cost of operation, you know, is that your model? If that is the case, likely, then you probably will be cheaper if you’re cutting costs; if you’re value-added or you’re cutting costs? If you’re value-added that you’re offering, we’re more features and benefits, you know, then you probably can be charged more than other people. Big questions.

Should you be going into the SAAS situation?

So many startups, Online businesses try to get onto a subscription. There’s a huge movement towards recurring revenue, showing recurring revenue. You have to really think. Does that suit your business? Is that really the type of business that you want to be operating? It gives investors confidence but you know, is it actually plausible into what you’re doing?

So that also has to be considered. I suppose you’re fundamentally, you have to really dig into what your business do. And what is the best way to charge for it? Just pick the best that you can think of at the beginning. Over time of course you can optimise, you can go into it once you get more professionalised, once one customer becomes ten, becomes one hundred and hopefully becomes thousands.

Then over time, you can start to optimise potentially bringing pricing expertise and pricing analyst over time and optimise that stuff. But you know you really got to think about what you know, I suppose companies will go through different strategies at different periods of their life cycle and development, you know, at the beginning.

Are you trying to grow your market share? Are you trying to get some sort of like give us good network effects?

I’m assuming that you’ll be wanting to try and grow the business and potentially to try and grow. You might be offering freemiums, or you might be offering lower quality, you know, tester versions of that. So again, all have to be considered, but you have to be, I suppose you put on the old saying a cart before the horse.

You know, what are you actually trying to sell? That’s the fundamental thing, pricing is not, it doesn’t separate, it is your commercial strategy. And the point I’m trying to make is, what is your business trying to do?

In an ideal world, let’s say, obviously you’re not going to do everything perfectly but is trying to do something and then once it’s doing that and a customer is, you know, bought into that and want that service or product or whatever it is, you know, how are you, what’s the best way to charge that customer for that while some shaving, your objectives of growing, you know, over kidding solvent until your next funding round? You know, that is the question.

I mean, you make a good point that you know, is a value discovery for one or two customers statistically valid? Obviously not, it wouldn’t be, but it gives you a starting point. And I think it’s an important point to note here, that value discovery is ongoing, it never stops. You’ve constantly got to do it.

Pricing Advice For Start-ups: So it’s important that you don’t lose track of the data and the insights that you learn from different customers, as you approach them, in terms of understanding value.

So actually, in a way, it’s a very scientific approach to understanding value and has to be set up as such for it to be meaningful in a statistical way.

And to give you insights that inform your strategy over time in regards to, when I was listening to Aidan there, you know, I agree, though there is certainly an evolution of pricing methodology that Startups and even big businesses, go through, starting with the rudimentary cost plus, knowing your cost and adding a simplistic markup going through that competitive benchmarking scenario.

When you line up all your competitors’ prices and then you go, “I think I’m going to be somewhere around here”, so you go, you pick lowest-highest and you go, “All right, I’m going to be here in this bit in this price bandwidth”. That’s what they call it. I’m not going to evaluate these methodologies will do that later on. And if you listen to other podcasts, you probably have heard us evaluate them.

I just talked about evolution and then I think Aidan was going on about SAAS businesses, using subscription models, now that’s a revenue model.

But the pricing methodology that tends to be adopted within that revenue model is called attribute-based pricing where they do look at the features and benefits of the product or plan and then they set their different price tiers.

You know, good-better-best essentially or decoy pricing based on those features and benefits, you know, evolution from there, you know, obviously got Dynamic pricing looking at, you know, inventory and capacity utilisation and demand and forecasting, and things like that.

And then in terms of evolutions of the subscription model, they go into like consumption-based pricing, where basically, you charge customers for how much they use different plans, that’s becoming particularly popular at the moment, and then from there, you know, a more sophisticated one is based on outcome-based pricing, but basically what a customer gets from using your service, your plan, your product.

Now, that’s a newer one. And all of these as Aidan says, it’s not like “Oh, that sounds good. I think we’ll just use that .”, even though 90% of SAAS businesses do that, they just go with trends.

Pricing Advice For Start-ups: You have to be very careful which one you choose because each have their limitations and it takes a hell of a lot of time and effort to integrate them successfully within the business model.

And if they’re out of sync with the market and the business model, they’re not going to generate profitable revenue growth, then, in turn, you’re actually going to lose probably more money than you make and overtime. So you’ve got to be right.

And this is why Aidan was talking about pricing expertise. It’s quite important to get that pricing expertise on board, but obviously, as a startup, you’ve got to be aware of the strengths and weaknesses of these different pricing methodologies. And what we’re trying to say is, the best way of doing that is, understanding your business model, thinking very closely and how it connects with the market.

And then thinking about, how you’re going to capitalise on the value that you’re offering based on the perceptions of the market, your customers and how they perceive and use that value. What do they get from working with you, in a very simplistic way.

From buying your product and working with you, how did they perceive value?

And what value do they actually generate in terms of, you know, do you help them lower cost, do you help them generate more revenue, I’m using your plan, your products, whatever. Are you helping mitigate some risk in a way for them? And those sorts of questions really give you a head start, when it comes to evaluating the best pricing model for your business.

I think everyone when you’re starting a business clearly you have to be a jack of all trades. You want to know a little bit about everything. But the thing about pricing is, I suppose people come and they go “Oh tell me, a pricing strategy” and we hear that a lot. The reality of it is, there’s no right or wrong pricing strategy.

There are many potential strategies you could implement. Some may be better than others clearly, obviously, how you implement them. There’s some science behind that, there are approaches, but you could have meant for many businesses.

Pricing Advice For Start-ups: You can Implement various strategies particularly when they were a very early stage.

When they haven’t proven anything you could tweak certain things in the trajectory that business will go in that are very different. So you could pick different ones at the beginning. Clearly, because they’re not tested by the market, they haven’t got many users and you haven’t got feedback. Clearly, some are more likely to be successful than others. And you have to visit.

There’s an art to picking that one. You know, the actual pricing strategy that commercial strategy used. Clearly, a lot depends on so many moving parts, you know your funding, you know, do your funding, or do you have to actually make profits from day one and grow boost route. You know, you look at MailChimp.

I think they never took on funding and grew pretty much organically by being profitable and then adding additional features over time, but not, you know, jumping massively, just growing gradually, Canva, probably the most famous Australian unicorn, fundamentally they grew at the beginning, by giving free service to huge numbers of people.

I don’t know what percentage of people who use that platform actually pay for it, I read, I think it’s in the papers this week, that it seems implausible, but apparently is true.

Every month over 1% of the world’s adult population uses canvas which does seem unbelievable. But apparently, those are statistics. So clearly they’re not all paying for this service but a significant proportion are.

So you know you’re thinking clearly they had funding and a lot of these startups are clearly lost making for many years. You’re thinking, Amazon, you’re thinking Uber, they’re clearly lost making for a very long period of time.

Pricing Advice For Start-ups: Until you know, the investors are confident that market share, skill, efficiencies, economies of scale all that stuff will factor in later, you know.

So those questions have to be asked and if your business needs skill to operate, to be profitable in three years time, then clearly you need to grow that scale and potentially, it could be, you know, using pricing strategies such as you know, skimming or like being even a loss leader or, you know, going in cheap and then over time adding additional services.

And you know upselling, so really look, the answer is,it really depends, but it all stems back to the beginning to having a clear view as to what your business does, having a rough idea is to what potential value it has and the longer term business model, focus on the business model.

And once you have that and confidence and backing in your team behind that business model, then you start charging forward and working out, putting in place, a model that can: a) keep your business solvent long enough until that’s achieved and, b) making as much profit as possible along the way. I think those are my comments today.

Bottomline: Pricing Advice For Start-ups

I like that. Don’t be afraid to try new pricing methodologies and revenue models. You’ve started your business now with a great proposition, you went with it, you’re already going in with an experimental sort of mindset, and you’re keen to learn. So just do the same thing with your pricing. I actually say, even in big businesses, it’s much better to learn quickly and fail quickly.

It’s okay if you make mistakes, as long as you learn from them, same applies, with startups, just learn and do exactly what you do when you’re passionate with your own product when it’s very the same mindset apply, so keep doing that and I hope along the way, we’ve given you some overview of all the different types of approaches that you can take.

That value-based approach mixed in with more of the technical sort of methodology that potentially is out there for you to utilise as you experiment and learn. Key to all of this is if you’ve got a number of different products and plans often, that means there would be different types of pricing approaches and models.

You don’t always use the same type of approach for everything, that’s sort of like when markets are more stable. So, having that creativity and thinking, a very granular level, when you have time about different products because every product has a different type of price sensitivity, and different value profile.

Pricing Advice For Start-ups: So you’ll find over time that different plans will require a different approach, but you’ll learn this. If you just keep on learning and testing and trialling but do so, you don’t lose that data.

You don’t lose all that learning. You apply it, feed it back and you continually update and learn and test and tweak, that really is pricing like it is with product development. It’s the same type of thing and same approach. I think overall I’ll leave it there. But feel free to ask any more questions about some great feedback from you guys recently. So keen to hear more, well thank you for listening.