It can be challenging to determine how you should price your products or services as a new business owner. Today, I’ll present various pricing strategies for startups. Plus, I’ll highlight important cost factors that you should consider to remain highly profitable.
The listed pricing strategies for startups are just as effective and important for large, established companies.
Before jumping into the methods of pricing you can employ, let’s talk about an important component: product cost.
1) Costs – have you captured everything?
What do you consider to be product costs? My question is not specific as to what the IRS considers to be the cost of a product. Rather I want to make sure that you consider the variable and fixed costs that product sales should cover.
Variable vs fixed costs
Variable costs are costs that arise as a result of sales. For example, as you receive more orders, you will need to purchase more packaging material and pay more sales commissions. What some forget are royalty expenses and franchise fees. Do you have to pay royalties on images or pay a franchise fee? (There are franchise fees that are fixed, most however, are based on percentage of sales.)
Fixed costs are those that are unaffected by your sales. For example, you may have taken out a loan of $300K with an interest rate of 6% to run your business. Whether you sell any products or not, you will be required to make interest payments – that is fixed. Similarly, rent and salaries are fixed costs.
Tip: List your month-to-month costs and classify them as fixed or variable.
Now, let’s talk about the various pricing strategies.
2) Cost plus pricing
This is the most frequently used method of pricing strategies for startups. Simply take the cost of the product and apply a desired margin, and voila, you have your price. There’s not much more analysis that goes into this method of product pricing.
Pros of cost plus pricing:
- Easy implementation.
- Covers product costs.
Cons of cost plus pricing:
- Does not take into consideration the actual value of the product to customers. Thereby, you may forgo significant profits since customers may be willing to pay more.
- Is only as good as the accuracy and completion of the costs identified. If the only costs taken into consideration are variable costs, your business will be running dry soon.
- Hidden costs are rarely considered or covered. Hidden costs could arise as a result of mistakes in orders or faulty products.
3) Value based pricing
Value based pricing aims to set the price of a product to reflect the perceived or experienced value to the customer. Here are some examples and factors:
- Price ranges in the fashion industry are very distributed, partially because of quality differences, but primarily because of diverse opinions of value. Achieving higher prices on products requires branding that reflects the higher perceived value. You may want to abstain from blow-out sales, if your goal is to sell your products as a high-end brand. Art is pure value based pricing. A painting may have significant value to an art collector, but no value to another person. The following article provides great tips for branding: The basics of branding
- Convenience is value. I’m willing to pay a higher price on light bulbs purchased on Amazon, to avoid a trip to the hardware store.
- Supply and demand impact value. A low supply of diamonds raises the perceived value. A high supply of products reduces the perceived value to a commodity.
- Offering a complete product portfolio (or workflow) raises the value of your products. If your shop sells fabrics, but not buttons or zippers, customers are required to place an order with you and your competition to get the required tools for their project. If you sell all products customers need for their project, you offer a higher value.
- Increased efficiency for the customer, raises value. Does your product simplify a process for customers? For example, your product may be an accounting module that integrates in webshops. If your accounting module eliminates 8 hours of overhead work each month, that raises the value to the customers.
Pros of value based pricing:
- Higher profits than a cost-plus approach.
- Proper consideration of value and effective pricing.
Cons of value based pricing:
- Complex analysis.
- Requires a sales staff that understands and commits to selling products based on value, not price.
4) Customer Specific Pricing & Discounting
You may want to take a different approach to your pricing strategy by setting the List Price at or above the Value Based Price and offer discounts based on the qualifications of your customers. By List Price, I am referring to the price that your customers see when they visit your website or skim your catalog.
Factors that qualify customers for higher discounts:
- Your top customers qualify for higher discounts. For example, you could say that customers who purchase $1,000 or more, qualify for a discount of 10%.
- Easy sales channel sale. Customers that place products over your webshop may qualify for a higher discount than customers who need telephone assistance.
- Customers that are partners get better deals. Laboratories that use your products for break-through research publication are partners. Their success will raise awareness and credibility of your products. These customers should be eligible to higher discounts. A famous fashion blogger, or influencer, can be eligible to higher discounts. When they wear your brand, they raise awareness.
Important: Your discount strategy must be clear and consistent for all your customers.
Customers talk and if you unjustifiably offer favorable prices to one, you may severely damage your business.
Other Discounting Options:
There are other discounting options you can employ, that are not related to qualifications of customers. For example, you may decide to offer discounts:
- An perishable items – if you offer edible products that are about to expire, you may want to increase discounts to quickly sell them off.
- At the end of the year – to ramp up sales in a given year, you may offer a seasonal discount.
- On end of life products – if you’re creating an improved version of a product, you may end of life the original and increase the discount to sell it off. Alternatively, you may offer a discount on the new product, to encourage purchase of the new product.
- To beat competitor prices and win new customers. If you have competitors that offer the same products, you can encourage customers to switch to your shop by offering higher discounts.
Discounting is an effective pricing tool. However, it must be used with caution as customers get used to frequent promotions. They may decide to hold their order, until a new discount promotion is in place. There’s a great article by Stanford’s Graduate School of Business on the Lingering Impact of Promotional Price cuts.
Pricing strategies for startups – conclusion
You’re now an expect on the topic of pricing strategies for startups (and large corporations). Pricing is a complex topic, which is why many companies have pricing departments or purchase expensive software to calculate the most profitable and effective price.
Now that you are aware of the different strategies you can employ and the various cost factors to consider, I am sure that your pricing methodology will be effective.