Finding the sweet spot in pricing startup products and services

By Editor September 10, 2014

Melissa M. Gelfand, SurePayrollBy Melissa Gelfand, SurePayroll

Let’s face it. You started a business for a variety of reasons, and one reason was inevitably to make money. Depending on your business model, pricing products and services may be more-or-less difficult. Initially, you may look at the costs of goods sold, your direct or indirect competitors’ pricing, and your required profit margins. Theoretically, if your product or service closely mirrors other competitors, then your pricing strategy would be rather simple. Charge too much and customers will seek out other options. Charge less and customers will buy from you.

In practice, your price point is critical to your business. Importantly, purchasing decisions are not black-and-white. Many factors impact these decisions, like perceived brand value, lifestyle, expertise, and more. In fact, consumers are propelled by emotions to make purchases. Studies show that positive emotions toward a brand have far greater influence on consumer loyalty than trust and other judgments which are based on a brand’s attributes. While services may be marketed a bit differently, pricing too low may make customers question your company’s value and expertise. Pricing too high may push potential clients away from you.

Pricing requires strategic thinking and ongoing management—and often startups do not invest the necessary time and resources into this critical part of their business. Actually, even larger established businesses can make costly pricing mistakes. It is not easy to place a value on your product or service.

Here are some important questions you’ll need to consider:

Are you positioning your business as a premium brand with the associated pricing and creating a new market segment? Chobani Greek Yogurt vs. Dannon Yogurt

Will you launch with promotional pricing in order to penetrate the market, build your customer base and/or drive to other products or services? Amazon’s new android just launched. It remains to be seen on how different it actually is and how it will impact its overarching market position in technology as well as consumers sales to its website.

Are you offering a similar product or services to competitors at lower price or rate? Think generic foods at your local grocery store or The Tie Bar vs. Prada.

Are you disrupting the market, providing a differentiated product or service and can set pricing based on the market and indirect competitors? Uber burst into driving services, shaking up the taxi and limo market by leveraging technology and convenience. The name ‘Uber’ is now used as a verb. Uber has great brand value to its customers.

Are you entering the market with an innovative product or service that is not even close to indirect competitors, and therefore you can set your prices very high initially–but eventually other businesses will join the market? Formerly, Apple created its own markets—like no others in existence—tablets, iPhones, et al.

So what’s a start up to do?

  1. Assess the cost of goods sold. Know the cost of your product or service today and ensure that you forecast for the first few years. Remember costs include running your business (salaries, rent, interest on debt and much more).
  2. Determine your required profit margin. This is a necessary piece of your initial business plan and also a required gauge for how your business is doing. If you are not making the minimum profit margin over a pre-determined time, then you should consider leveraging your exit strategy. Your revenue provides a compass for your business.
  3. Research your direct or indirect competitors. Know what your competitors are doing today and potentially tomorrow. Research what is trending online. Track news and information regarding your industry.
  4. Evaluate the market. Align marketing and promotional strategies with your pricing strategy. Talk to potential customers or clients. Try to determine the potential size of your market, the uniqueness of your offering and the competitive landscape. How much do you think you can sell?
  5. Determine the value of your product or service. Remember your company delivers an emotional experience—everything from how you market and sell the product, to how you help people use it, and how you maintain it going forward.
  6. Know your target audience. Understanding your target audience—their wants, needs, habits on and offline–is critical to your long-term success. Continuous research is required based on changing markets, economies, products or services.
  7. Differentiate your product or service. Differentiating your product allows for greater price control. It’s a great opportunity to disrupt the market.
  8. Continuously monitor the market, current competitors—and future competitors. The market changes quickly. If you become too absorbed in running the operation of your business, you can lose sight of the evolving market.
  9. Seek out tools to help. Assess the new digital tools available to help you navigate pricing in your market.
  10. Measure results. Tweak as required. Depending on variables in input costs, growth strategies, or market changes, you will likely need to raise prices. Make sure you do it in a way that does not alienate your current customers. Be sure to understand what the market will bear. Look at gradual price increases over a set time period rather than obvious large price jumps that make customers think twice before making a purchasing decision.
  11. Communicate pricing changes. You’ll want to also carefully consider how you’ll communicate pricing changes once you’ve set your pricing.

When it comes to making money, billionaire business guru Warren Buffett knows where the rubber meets the road. In 2011, he told the Financial Crisis Inquiry Commission in an interview that: “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. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” So, don’t neglect your pricing strategy—today or tomorrow. In the end, pricing products and services is not a one-time review, but rather a continuous process requiring ongoing attention.

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Melissa M. Gelfand created, launched, operated, and eventually sold Goldyn, Ltd., an ecommerce and pop-up women’s clothing store. She has more than 20 years experience in public relations, marketing, politics, government, and communications, developing innovative strategies and tactics for internal and external clients.

Melissa is a contributor and writer for the SurePayroll communications team and an entrepreneur/start-up business owner.