For The Love Of Price
The good, the bad and the ugly of pricing strategies for startups.
Charging for consulting — I am getting daily requests to help earphone startups.I know just enough to “turn the key” for anyone starting this type of business, as well as solving manufacturing and design issues as they come up.
I’d like to dive in. How should I figure out what to charge?
Edited question above to make it shorter
I wrote this answer and am reposting it here.
Just finished this long ass reply and my phone died.. that was a nice lil’ soul crusher right there xD
Anyhow.. I’ll keep it a lil shorter this time..
EDIT; Wow.. I failed harcore at that haha..
This is a really fun question cuz I like pricing strategy..
But I’ll give you the TLDR; Go talk to your users. Ask them how much they’re willing to pay and let that be a starting point and go from there.
Pricing; Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business’s marketing plan.
According to the good ol’ cyberintrawebsspace.
That last part of the sentence is what we’re interested in..
There are a few common pricing strategies:
1. Neutral Pricing (or Herd Pricing as I call it)
Neutral pricing means you basically copy what everyone else is doing. With is Jimmy doing? What’s Samantha doing? Okay I’ll just do that as well. ‘’Maybe I should be slightly higher to have better margins? Wooww cowboy, let’s not get crazy here..’’
You’re not trying to gain or lose market share.. you’re not trying to cause a ruckus.. you just trynna get by..
It goes without saying that this is the most common pricing strategy in a culture where we’re taught to adhere to the status quo as best we can.
The corollary of this is that you’re undifferentiated in a competitive market.
Since you had the words ‘’unique area’’ in your question.. this obviously does not apply to you.
2. Penetration Pricing (Selfish Pricing as I call it)
This is the second most common form of pricing.
It almost always occurs because the owner is either greedy (has a lot but wants more) or selfish ( can’t get enough users so drops pricing) ← very often this one.
This is actually how pricing wars get started. Sally wants more market share.. Alessandro (what? I wanted something more exotic, sue me!) wants to prevent that or reacts to a drop in users and lowers price as well.
This easy to follow Game Theory animation discusses location but can be applied to this situation as well.
In an ideal world, everyone would do what’s best for the user.. ending up with a socially optimized solution.. what happens in the real world is 1 jerk screws it up forcing all ‘players’ to adhere to a nash equilibrium.
The reason why it’s called Penetration Pricing is because of the second use which isn’t reactionary but rather strategic.
You’re entering a new market so by keeping the price X low (X>=0) you’re penetrating the market quickly, securing a large market share before anyone else can.
We see a lot of internet businesses do this.. either free or low price to get growth.. and monetize later. You could view Google that way by offering search for free.. and much later monetizing.. not even through their users but through advertisers.
This is typically the strategy that directly follows Neutral Pricing because you’re undifferentiated in a competitive market.. the user doesn’t care about you.. reality of low sales replace optimism and dreams.. this strategy follows in the hope of acquiring users. Almost never works.
3. Forward Pricing (I call this Backward Pricing.. naah just messing with you)
Means you’re selling with a loss because you’re hoping your cost will drop later on.. Thus acquiring enough market share and making enough of a profit to offset the early loss of capital.
In the early sixties — long before I was born — there was a shift from vacuum tubes to solid state.. Tubes were under a buck but transistors we’re pricey, as is always the case with first iterations of new technology. They strategically sold at a loss during early days expecting prices to drop later on. As semi conductors continued to decrease in price and increase in power and as the ease with which thousands of transistors could be put on a single chip, those expectations turned out to be correct.
4. Price Skimming
Means you’re trying to segment the market and charge more because you have a non sustainable competitive advantage. (Thus you’re not in competition but rather in a monopolistic position.)
You charge early adopters a premium for the privilege to be the first to have your product.
Once you hit the upper bounds of that market segment you drop the price to serve the middle of the market.
Eventually you could drop some more to attract late adopters.
None of these strategies really apply to you..
You’re not a commodity.. so neutral is out. Penetration is out as well cuz as soon as you do that you become just another commodity. What’s the difference between you and Joe Shmoe? Consumers illogically use price as an indicator of all sorts of unrelated factors like quality or benefits.
Which brings me to my final point.
5. Value based pricing.
You price according to value.
Every time Apple releases a new product you can read tons of reddit and YT comments saying how it’s only worth $X (if you calculate all the costs) and everyone is overpaying cuz they dense as fuck..
Well price does not equal the sum of all the costs + a lil margin. (this btw is ‘’cost plus’’ pricing, used when you wanna keep the prices as low as possible like Amazon/ SpaceX.)
Price equals whatever the market is willing to pay. Why does a Jackson Pollock painting cost more than an exact copy? It’s because the market values artists ( as in creation, monopoly, Google/Apple) over painters ( as in copiers, competition, a barbershop).
So how do you find out the optimal value?
If ‘the universe’ could tell you the optimal value was X.. but you started with 1/3X, isn’t the market anchored to that price now?
Yes.. that’s why it’s impossible to implement it perfectly..
So what I advise you to do is just talk to users.. ask them what they would pay?
Ask multiple users and use that to get an idea of how much you should charge.. It’s not just about price.. you also need to find out why they wanna pay a certain price, what overhead do they have, how much you could save them etc.
But there’s an easier way to do this right. Just use a heuristic. User love.
Optimize for ‘user love’. Then the right choices will naturally flow out of that optimization. What can you do to help your users as much as possible and make them love you.
In order to make them love you, you have to love them. In order to make them trust you, they need to believe you have their best interest at heart. So naturally, you’d try to help and understand them as best you could.
If you’re in the long term game, you’ll gain more by not optimizing for profits esp in the early days.
If you have any other questions lmk :)
I also work with startup founders for free over @ circleanddot.strikingly.com
xoxo RJ
