Startup 101—Lesson 2: Does My Startup Have a Good Pricing Strategy?

“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.” This quote, from billionaire Warren Buffett, illustrates what the startup experts at Promeets already know: if your business does not have a good pricing strategy, you’re very unlikely to succeed.

In our second lesson in the Startup 101 series, we address the very important topic of pricing strategy. Do you have a good one? How does it measure up against your competitors? And what do you do if you find out it’s not working like it should? Here are four growth hacking tips to develop a good pricing strategy for your team and what to do if you’ve realized that you’ve missed the mark.

TIP 1: Make Sure It Fits Your Business Model and Product or Services Offering

There are multiple potential pricing strategies that may help grow your startup. These may include offering free (freemium) or low-priced trials that are designed to convert into premium subscriptions. Or, simply tiered pricing structures that are based on the level of services provided or products offered.

How do you know which one is right for you? It’s vital that your pricing structure fits your product or services offering and business model. If your main offering is an app, you can consider offering free or low-priced trials and up-charging for premium services associated with the app. Netflix and Spotify have similar types of service offerings, but have chosen two different pricing paths—Netflix offers different tiers of paid services priced according to the level of the offerings, and Spotify offers both a free and paid version of its app with added features for extra dollars.

TIP 2: Study Your Competition’s Pricing Strategy

Doing some market research is vital when it comes to pricing strategy. How are your direct competitors pricing their products or services? Does it seem to be working for them? If you decide to use the same pricing structure as your competitors, startup consultants suggest you shoot for a minimum of 33%-50% savings to maximize your chances of gaining customers in the same target market. Once you establish your business and are more familiar to potential customers, you can always raise your prices or add more premium features.

TIP 3: Imagine the End Result—Then Work Backward

Reverse engineering success—or working backward from the end goal to the present moment—is one of the startup growth strategies that many successful new businesses have used. Let’s look at how this would work with a startup that has created an app to help tech employees better manage their time. Your end goal may be to have 60,000 subscribers who pay for at least the mid-level tiered program priced at $35 per month by the second year. Working backward, you can determine how long this might take, the steps you need to get there, and, finally, where you need to start. When you view it this way, it may make sense to offer a free version to your target market for the first 30 days as a way to spread buzz and reach your ultimate goal of tens of thousands of subscribers.

TIP 4: Be Prepared to Change if It Doesn’t Succeed

Remember music-sharing giant Napster? Their pricing model focused on the free sharing of music between its members, which worked extremely well until they were called out by mega-band Metallica and subsequently sued. After landing in bankruptcy court, the company was purchased and completely revamped to become a successful paid music downloading service with more than nine million songs in its catalog.

The moral of the story? You need to be flexible if you find your pricing plan isn’t working out. Hopefully, you won’t run into the legal trouble that Napster did, but you do need to pay attention to red flags, such as low subscription rates, bad reviews, and potential legal challenges. If you see that your strategy isn’t working as you had hoped, re-think and re-launch your pricing strategy.

Having a great product or service and a good marketing plan can only take you so far if your pricing strategy is not on point. When you utilize the four pricing strategy startup tips, you can increase your chances of a successful venture. Want more advice on how to grow a startup? Book a meeting with one of our growth hacking experts today!

 

1 thought on “Startup 101—Lesson 2: Does My Startup Have a Good Pricing Strategy?

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