Use market intelligence to guide monetization and pricing decisions
Pricing models can be powerful levers for growth. A bad pricing model will stifle growth and may even doom an otherwise promising startup, while a good model will capture some of the value a product creates as revenue and keep growth flywheels rolling.
A startup’s growth can be threatened if it takes too long to overhaul its model, especially in times of rapidly changing consumer behavior and inflation.
Developing or revising a pricing model is a complex and multidimensional problem. The price is the most obvious element, but there are many others. Getting it right requires many viewpoints: product, operations, finance, and sales, to name a few.
Here’s a closer look at the questions we ask to start laying the groundwork for a pricing strategy.
5 key questions in our pricing strategy framework
Before working with startups, it helps to understand where they are and where they are going. Pricing models should address considerations from at least two different perspectives.
- Which stakeholders create (or contribute) value?
- What is the value created?
- What are their alternatives?
Pricing models that scale with value tend to capture more value in the form of revenue and contribution margin.
The commercial point of view:
- What does it cost to serve customers?
- How does price affect growth loops?
Paying customers want their issues resolved quickly and reliably at the best possible price. Companies want to sell their products or services to the greatest number of customers, at the highest possible margin. These two perspectives are inherently opposed, and it is the job of the founders to find the balance and create a pricing model that balances the needs of the company and its stakeholders.
The first step towards building a pricing model is to gather the research and organize it into a format that can be used to assess the trade-offs. We advise founders to construct a product journey map that helps them synthesize stakeholder and company perspectives within the context of the competitive landscape.
The world is changing rapidly for early-stage startups. Even for startups that have already brought their product to market, it’s a good idea to periodically re-evaluate pricing models in light of new products and features, or after changes in the competitive landscape.
What to do before creating or revising a pricing model
When founders attempt to release a new pricing model, they face many difficult questions:
- How can innovative companies price their products in a whole new category?
- How can companies be sure that optimizations on one side of their market will not negatively affect the other?
- How do you create a pricing model that increases prices in proportion to a customer’s willingness to pay, without appearing parasitic?
These and other questions can be answered by estimating willingness to pay from three key benchmarks: