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Today, let’s talking about that one thing that’s crucial if you wish to generate any revenue: pricing. Truth be told, most founders price their product wrong and leave millions on the table. Yes, it’s extremely hard to get the pricing right from the get-go, but most people don’t iterate on the pricing (ever), and that’s wrong.
Having said that, pricing a product is long and ardous, and there are a tonne of hiccups along the way, but that’s okay. In this post, I’ll discuss how to think about pricing. I’ll also share a framework that’ll help you price your product right. Let’s crack on!
First, until you hit product/market fit, revenue isn’t revenue, it’s validation. A paying customer means that the product is good enough to solve their problem, that it provides more value than it costs, and that their problem is painful enough to pay for a solution. Every customer’s payment validates the product, its value, and the problem. That’s it, nothing more.
Second, setting the correct price isn’t important at this stage. As long as it’s not higher than the value the product offers, and as long as customers are wiling to pay, it’s good enough. Optimising the price for revenue comes later.
But in any case, when customers encounter a product for the first time (be it before or after product/market fit), they look for contextual clues to help them figure out what it is, who it’s for, and why they should care. Taken together—the features, design, messaging, pricing, and branding—it creates context in the minds of customers, and sets the scene for the product.
Knowing this—how your product is positioned in the minds of customers—is crucial in pricing it. To get started, use the following componenets to measure your product:
Alternatives: What customers would do if your solution didn’t exist
Uniqueness: The features and capabilities of your product that the alternatives lack
Value: The benefit that those features give to customers
Market Characteristics: The characteristics of your buyers that make them care about the value you deliver
Market Category: The market your product is part of and that you communicate to customers to help them understand your product’s value
Relevant Trends: Trends that your target customers understand and/or are interested in (that can help make your product more relevant)
This exercise would give you a fair idea about where it stands. For example, if your product is unique in its category, delivers the greatest value, and your target customers can afford to pay good price, you are in a unique position to brand it as as premium product.
To give you an example, Superhuman (the email client) sells at $30/month. If you think about it, it’s a simple wrapper over Gmail (which is free), but it’s a successful product because it’s positioned extremely well.
Ketki Duvvuru, Superhuman’s Product Lead and their first PM was super specific when she said to me, “Gmail caters to all sorts of users—those who get one email to those who get five-hundred emails a day. Superhuman, on the other hand, is targeted towards prosumers only—those who get tonnes of emails every day and those who value speed of getting things done (i.e., reaching inbox zero) above everything else. Superhuman is an email productivity app.”
On the other hand, Basecamp is in a busy space of project management apps, and even though it’s somewhat unique in its value proposition, it charges a reasonable price since it caters to small and medium businesses. There’s a reason Basecamp doesn’t even have a per seat pricing. They know where they stand and who they stand for—the “Fortune 500,000” companies. This knowledge helps them price their product right for their customers.
A good framework to think about pricing is the Van Westendorp Pricing Model. This model was originally designed to determine consumer price preferences during market research, but this can also be used as a framework to reach a ballpark price of your product:
At what price would the product become too expensive?
At what price would the product become too cheap?
At what price would the product become expensive, but customers would still buy it?
At what price would the product become a bargain?
You should know that there’s no one right answer to these questions. Depending on what problem you are solving, how big a problem it is, and how much your target market is comfortable to pay, these answers vary.
To get back to Superhuman, their target users—knowledge workers, founders, managers, execs—immensely value their time and have to read, process, reply to a lot of emails every day. Gmail is time-consuming and all the available email clients don’t optimise for speed of reaching inbox zero. This allows Superhuman to position itself as the only product that’s catering to their need for speed. This also gives them leverage to charge a premium which their target customers can easily afford.
Premium or not, as a rule of thumb, you should avoid pricing your product as too cheap or too expensive.
Selling a cheap product either means leaving money on the table or competing with others solely on the price point. Not a good plan!
An expensive product, on the other hand, is a bit different. It means even if customers love the product, they feel the price is too high for the value they get. This is usually a result of bad positioning. For example, Superhuman has flawless visual design. Had it looked liked Gmail, it would have been “expensive” instead of premium. Know the difference!
Considering you know your customer and their price sensitivity, your goal should be to build a great product and charge a high price—something that is just enough costly for a customer to still buy it. Unless you are selling a commodity, it isn’t a big challenge.
For example, Basecamp tripled its entry price from $29/month to $99 a couple of years back. They made some significant changes to their product and increased its price. The price went from being a bargain to being slightly costly—but not too costly for their target customers not to buy.
Again, it’s not that straightforward. Pricing strategy needs constant experimentation and optimisation to find the right number. A/B tests (using Mixpanel or similar analytics tools) come handy.
For example, you can show 100 potential customers 5 different prices, and choose whichever price (from the higher side) has a relatively higher conversion rate. Or, you can increase your price and stick to it for the next six months, then look at the data after six months to decide whether to fall back, stick to it, or push further.
Pricing has a compounding effect, and most startups don’t give enough importance how the difference of a single dollar compounds in the long run as volume increases and time passes.
Contrary to popular belief, people don’t want better things at cheaper price. Yes, nobody wants expensive products, but they don’t mind paying a premium if they see value, i.e., if it’s positioned well. Charge more. Always!
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Do you agree with what I said, or do you think otherwise? Send me counters, comments, questions, and other ways to run a business. 🙌
Until next week,
P.S. I also write The Sunday Wisdom, a weekly newsletter that challenges the norms and learned beliefs about how the world works. Delivered every Sunday at 6PM IST.