The purpose of a price is to tax the usage of a product.
There are different methods of doing so, and the best way to tax a product properly is to look at the ingredients and to determine how It’s an ever-changing business model and so it requires an ongoing discovery process as the company and market evolve together.
This is an example of the mistakes I’ve seen others make.
A. Complex or unintuitive pricing model
A good pricing model appears simple and logical to the customer.
At first glance, Amazon’s prices may seem complicated. The tax is applied based on the perceived value to customers, and not just the physical cost of the item sold.
Customers have their own unit of measure. Often for applications, it’s people— hence a pricing model by seats.
At other times for infrastructure, it’s either bits or bytes for storage or cycles or processing power for computing.
But mixing these models by charging for a people-based product in units like bytes doesn’t work.
Pricing models for Slack that charge for how many bytes are being sent through the channel per month work conceptually, but are intangible, hard to understand, and also impossible to predict the ultimate cost for the buyer.
B. Move to annual prepay too late
For good reason, the annual prepay idea was popularized by the company. Cash flow from annual prepay is used to accelerate growth. Customers lend startup money in order to grow. When a startup is young and the product is immature, it can be difficult to demand an annual prepay from an account executive. It’s worth trying to push as early as possible. Your startup will need less capital to grow, as it will grow faster.
C. Employ static pricing
The revenue on the supply/demand curve is the most important factor in determining the optimal price of a subscription product. In contrast to the charts my Economics professor drew on the blackboard, startup price demand curves aren’t static. They don’t stay the same as time goes on.
The marketing team strives to improve the demand curve by building a brand, developing reference customers, building strong return on investment case studies, and building the lead funnel. As a startup becomes better known, the demand for the product increases, lifting the price demand curve, and with it the optimal price point. Dramatic effects can be seen with these effects.
D. Fail to embed concessions in the proposal
When selling to mid-market companies who buy software with purchase orders, not credit cards, startups will need to survive the procurement gauntlet. The success of the procurement teams in negotiating lower prices is often rewarded.
The ultimate price target for your product is achieved through structuring proposals with this in mind.
E. Using the wrong price discovery questions
The customer will almost never be forthcoming when asked how much they are willing to pay for a product. It is against the interests of the economy to reveal their willingness to pay.
Relative price is a lot easier than absolute price.
How does the customer compare to similar products and services in the marketplace? What’s the customer willing to pay for something similar?
When SaaS startups think of the cost of new tools, they think of the cost of a Salesforce seat. 10–20% of a Salesforce seat for a productivity tool seems reasonable.
This new lead generation product is just as valuable as Salesforce.
Pricing is a moving target and so should be viewed as an ongoing product discovery process.
Pricing should be revisited regularly, monthly at the beginning of commercialization and then less frequently as the company grows.
Watch out for these potential pitfall pricing problems and you’ll be able to reach that perfect pricing mechanism in no time.