Whenever you are running your own business, especially a tech startup, establishing the prices of your products and services is among the most challenging tasks you face. People deduce the value you give to your products and services from the prices you attach to them. Therefore, if you can get your prices right, you will lay down a platform for the success of your business. However, if you get it wrong, it will severely affect your company’s sales and cash flow hence profitability.
Traditionally, pricing has been a sales and marketing’s team concern. However, the pricing process is now about price optimisation, which requires strategies from finance which can drive these strategies. The pricing process also requires that you as the founder of a startup tech company have a close interest in it.
If you set your prices exorbitantly high, you will put off potential clients. On the other hand, low prices create an incorrect perception in people about the value of your products and services. They will be willing to pay your competitors more if they feel your competitor is offering better value. Furthermore, once your product hits the market, it is nearly impossible for you to raise the prices.
According to McKinsey, an analyst firm, of all poorly chosen prices, 80% to 90% are too low. Your aim as a tech startup is to set your prices at a level where they are not low neither high, and this is the optimal price. An optimal price maximizes your profit and keeps the prices attractive.
Why startups get their prices wrong
As stated earlier, low prices are often the poorly chosen prices as compared to high prices. Most startups initially set their prices low to attract customers hoping to raise the prices once they build a portfolio. However, even after winning businesses and building portfolio, it remains hard to adjust the prices to the market price for fear of losing the customers. They, therefore, continue winning clients and their businesses look busier than others do, but the problem is; it is not sustainable.
Though you will still be in business, you will have to work for more hours to stay afloat. In such a case, your competing ground is the low price, and it is a dangerous thing since your competitors can easily edge you out of business by simply undercutting you.
How can startups set their prices right?
The good starting point to set prices as startups is to use the Value-Based Pricing model where you come up with a price that your customers are willing and able to pay. The first step into using this model is answering the question; who are my toughest competitors?
You can find out by asking your customers which product they would have bought if not yours. Their answer will give you are their second best option which is your first competitor. Before you carry out the value based pricing, it is important you look at value based buying to determine how customers make their decision to decide which product to buy.
To do the value based purchasing, select one of your competitors. Know the cost of your product and that of the competitor and then list all the differences between the two products not forgetting to point out those areas where your competitor is better. You should know that the value of these differences is what makes customers buy one good and not another.
Once you are through with the value based buying, follow these simple steps to come up with a value-based price.
- Identify your first competitor and determine their price.
- List how your product is better that your first competitors. Estimate the cost these differences would be worth to your customers.
- List how your first competitor’s product is better than yours. Determine the cost these differences would be worth to your clients.
- Finally, calculate the best price by taking the price of your first competitor (step 1) add to your products advantage value (step 2) and minus the value of your competitor’s product advantage (step 3).
Price = step 1 + step 2 – step 3
Since clients who do not buy your products and those who do value your products differently, it is important also to choose a customer who did not buy from you and do this analysis from the finding you get from them. From this, you will be able to get the advantages and disadvantages of your product, but you should price for the customers who value the benefit of your product.
The price you get from this analysis is not the “right” price, but it gives you a value close to what you should use.
How can you tell you have set your prices too low?
If you find yourself working for very long and tiring hours with little to show for them and you are struggling to get by, that is a sure indicator that you could have set your prices too low. You'll likely need support to fix the right price, and The Accounting Cloud can offer you this support. Feel free to contact us anytime.