I was recently asked my thoughts on how to approach pricing digital products aimed at the local Small and Medium Business.
Actually, the exact question was:
Basically, I’m looking at how new startups decide on a pricing structure when they’re selling to SMBs. Essentially, you’ve got your product/platform/system, and you’ve pinpointed your target customers—now how do you determine how much to charge? Obviously market research is important, but what specific recommendations do you have in terms of how to pinpoint the right pricing for a new digital marketing/hyperlocal platform?
Pricing is a tricky thing. Price too high and you put yourself out of business because no customers will pay that high of price for your product. Price too low, and you run the risk of giving away too much for free and struggle to keep the doors open – again possibly going out of business. Digital or not, a startup needs to be able balance the need to generate revenue with the opportunity to attract as many customers as possible.
I think it comes down to doing a few key things really early on. First, study the current market to determine who is offering what and at what price points. You should be able to look at the market and see the high end/low end products and their associated prices. You then look for the holes in the market – where’s the point where customers are paying too much for not enough value? That’s where you can bring something highly valuable to the table at a more affordable price and undercut the market.
Second, it’s really important to determine what problems you are solving and what value you are actually providing. If it’s just the same as others on the market then it will become a price war with competitors – which you probably don’t want since it usually is a race to zero. Ask yourself how can you do something new and innovative that hasn’t been done before, and then you’ll have more freedom on the pricing structure. McLean Reiter, CEO of hyperlocal startup Knotis, echo’s my thoughts. He says “Most SMBs have less than $1,000 to spend on marketing, annually, so it needs to be affordable and if possible, monthly, to help them manage their cash flow better. So It all comes back to value – what do they get in exchange for what they are paying for. You need to price yourself according to the market and your overall objective, while also maintaining profitability.
Lastly, it’s truly impossible to determine your exact prices before you go to market and interact with customers. Smart entrepreneurs engage with their customers early on, ask them about price points and adjust/iterate as they continue forward. Founders should also use these customer interactions to uncover the hidden needs of customers, which becomes the real value of your product and thus helping to determine a pricing model. People pay higher prices for things they really need and can’t get elsewhere. And ultimately, companies should A/B test certain price points (offer variable pricing to random customers through marketing and study the results) to see which convert better and then optimize from there.
Pricing can be tricky. So agree to understand you will not know what your pricing will be out of the gate, you will only learn what it should be over time.