Pricing strategy for startups: Do technical co-founders suck at pricing?
I was just looking at the new prices for WhoAPI, and I have to say that for the better part they were set up by the other co-founder. I wanted to raise some concerns, and instead of just going to him individually, I decided to write this blog post. Hopefully, it will help startups like Webiny who are just in the process of changing their pricing strategy. And also give me a chance to go through some things on my own, and give an opportunity to the other co-founder to learn something.
In startups like WhoAPI, and Webiny, where there is a mix of technical and business-oriented co-founder pricing, is a tough call to make. The technical guy either overprices (because he cares about his masterpiece) or underprices (because he is considering only the cost of his development time). It’s not that the other one doesn’t care about his masterpiece, it’s just that technical co-founders are short sited when it comes to pricing.
I believe that nobody is good at everything, and I have yet to meet a technical person that kicks ass at pricing strategy. Maybe I did meet him, but we didn’t talk about pricing. That’s because technical guys don’t like to talk about pricing, business guys do. Get it? Rocky will knock you out with his left hand, but his right hand is just not so powerful. Then why does Rocky like to punch with his right hand? Now, don’t get me wrong, I love technical co-founders, I work with one for the past 10 years, and you will find here interviews with them, but at least they could read a little bit about this if they want to make such a key decision.
The technical co-founder needs to put in the quality input guiding the business co-founder, giving him a ballpark on the complexities of their product. And then the business co-founder needs to set the prices. After all, it’s his ass on the line if the product doesn’t sell, or the company isn’t making enough money. (That off-course is unless it’s a lousy product). But it’s not about covering your ass, it’s about getting the company (meaning everybody onboard) move forward!
Pricing a product is one of the toughest things to do in business, especially in startups, and especially in disruptive startups with innovative products (or services, but I am using the word product). Pricing your products properly in many ways leads to the company’s success!
Before setting prices, one must be clear about one thing, you are here to make money. The creative part is over, now it’s time to focus on making money. This does not mean “rip people off”, but take into evaluation what your client’s ROI will be. So, don’t sell that life insurance to the poor guy who barely has money for bread, just to make the sale. Making money means generating enough revenue from selling your products so that you can not only cover your costs but take a profit and perhaps expand your business.
The biggest mistake many businesses make is to believe that price alone drives sales. Prices, rebates, discounts are just short-term rush, like a drug. It creates addiction, and takes you to a downward spiral! There is no passionate clients and buyers that tattoo a company logo on their body! Do you think that a 20% discount will make your client tattoo your logo? On more information about this, please read Simon Sinek’s: Start With Why.
Selling price is a function of your ability to sell! Everybody can sell a Ferrari for $200, but can you do it for $200,000? It’s no surprise technical people aren’t good at setting prices, most of them aren’t good at sales! You can find more about this with How to Sell at Margins Higher Than Your Competitors : Winning Every Sale at Full Price, Rate, or Fee, Lawrence L. Steinmetz, co-author of How to Sell at Margins Higher Than Your Competitors : Winning Every Sale at Full Price, Rate, or Fee.
“What’s the difference between an $8,000 Rolex and a $40 Seiko watch? The Seiko is a better timepiece. It’s far more accurate? The difference is your ability to sell.” says Lawrence L. Steinmetz.
Usually, it involves considering certain key factors, including pinpointing your target customer and take into account how much will he profit from your product (or what will your product provide him), tracking how much competitors are charging, and understanding the relationship between quality and price.
- Your actual product costs, including labor and the costs of marketing and selling those products.
- All of the operating expenses necessary to own and operate the business.
- The costs associated with borrowing money (debt service costs).
- Your salary as the owner and/or manager of the business.
- A return on the capital you and any other owners or shareholders have invested.
- Capital for future expansion and replacement of fixed assets as they age.
You may realize that you have missed your target audience by pricing your products too high. You can always choose to discount your products or give customers something for free in order to get them to try your product or generate traffic to your storefront or website. “You have to get people in,” says Charles Toftoy, associate professor of management science at George Washington University. “People like getting something for free or some kind of discount.
Your product price should vary depending on a number of factors including:
- What the market is willing to pay.
- How your company and product are perceived in the market.
- What your competitors charge.
- Whether the product is “highly visible” and frequently shopped and compared.
- The estimated volume of product you can sell.
One thing is for sure with pricing, you will know really soon if you got it wrong…