Startup Pricing Strategies
Startup Marketing Masters Series
Startup Pricing Strategies
What is a Startup Pricing Strategy?
A Startup pricing strategy can be defined as "What a business uses to determine how much to sell product/service for that requires a thorough understanding of your product, your marketplace, and your customers."
In this presentation and discussion with Trevor Shorte and the Startup Coach includes what is the big deal Startup Pricing Strategies?
Common Pricing Strategies - 3 Major Strategies
Customer Value Based Pricing
Cost Based Pricing
Competitor Based Pricing and price wars
Which one should you choose
Some Startup Pricing Strategies Questions Discussed
What points do you weigh when you are launching your first mvp and want to be financially sustainable to see to your next mvp vs making it attractive enough to build up a larger user base at the start?
Hoping you will cover peronal services like consulting - retainer vs hourly vs?
Price Anchoring as a sales tool vs Pricing Strategy
How do you know if it is a sales technique or a pricing strategy is not working
Where have you seen Dynamic Pricing work outside of UBER and hotels rentals (House rentals etc)
Trevor Shorte is the Managing Partner of SongBird Marketing Communications, an award-winning agency that helps businesses find their voice in the world of Social Media, PR, Branding, and Marketing. Trevor has used his 25 years of business experience to build a reputation for developing business strategies, incubating new business models, and building out channel programs for clients.
Over the course of his career Trevor has worked with numerous brands and corporations in the telecommunications, IT, and retail industries creating product marketing/development strategies, programs and communications.
An active member of the Ontario startup community, Trevor works with TorontoStarts as a mentor and The Fashion Zone at Ryerson University as a Business Advisor offering workshops, one-on-one consultations, and guidance for entrepreneurs and startups in various industries such as Fashion, Cryptocurrency, Tech, Consumer, and e-Commerce.
Startup Pricing Strategies
Competition-Based Startup Pricing Strategy
Competition-based pricing is also known as competitive pricing or competitor-based pricing. This pricing strategy focuses on the existing market rate (or going rate) for a company’s product or service; it doesn’t take into account the cost of their product or consumer demand.
Instead, a competition-based pricing strategy uses the competitors’ prices as a benchmark. Businesses who compete in a highly saturated space may choose this strategy since a slight price difference may be the deciding factor for customers.
With competition-based pricing, you can price your products slightly below your competition, the same as your competition, or slightly above your competition. For example, if you sold marketing automation software, and your competitors’ prices ranged from $19.99 per month to $39.99 per month, you’d choose a price between those two numbers.
Whichever price you choose, competitive pricing is one way to stay on top of the competition and keep your pricing dynamic.
Cost-Plus Startup Pricing Strategy
A cost-plus pricing strategy focuses solely on the cost of producing your product or service, or your COGS. It’s also known as markup pricing since businesses who use this strategy “mark up” their products based on how much they’d like to profit.
To apply the cost-plus method, add a fixed percentage to your product production cost. For example, let’s say you sold shoes. The shoes cost $25 to make, and you want to make a $25 profit on each sale. You’d set a price of $50, which is a markup of 100%.
Cost-plus pricing is typically used by retailers who sell physical products. This strategy isn’t the best fit for service-based or SaaS companies as their products typically offer far greater value than the cost to create them.
Dynamic Startup Pricing Strategy
Dynamic pricing is also known as surge pricing, demand pricing, or time-based pricing. It’s a flexible pricing strategy where prices fluctuate based on market and customer demand.
Hotels, airlines, event venues, and utility companies use dynamic pricing by applying algorithms that consider competitor pricing, demand, and other factors. These algorithms allow companies to shift prices to match when and what the customer is willing to pay at the exact moment they’re ready to make a purchase.
Freemium Startup Pricing Strategy
A combination of the words “free” and “premium,” freemium pricing is when companies offer a basic version of their product hoping that users will eventually pay to upgrade or access more features. Unlike cost-plus, freemium is a pricing strategy commonly used by SaaS and other software companies. They choose this strategy because free trials and limited memberships offer a “peek” into a software’s full functionality — and also build trust with a potential customer before purchase.
With freemium, a company’s prices must be a function of the perceived value of their products. For example, companies that offer a free version of their software can’t ask users to pay $100 to transition to the paid version. Prices must present a low barrier to entry and grow incrementally as customers are offered more features and benefits.
High-Low Startup Pricing Strategy
A high-low pricing strategy is when a company initially sells a product at a high price but lowers that price when the product drops in novelty or relevance. Discounts, clearance sections, and year-end sales are examples of high-low pricing in action — hence the reason why this strategy may also be called a discount pricing strategy.
High-low pricing is commonly used by retail firms who sell seasonal or constantly-changing items, such as clothing, decor, and furniture. What makes a high/low pricing strategy appealing to sellers? Consumers enjoy anticipating sales and discounts, hence why Black Friday and other universal discount days are so popular.
Hourly Startup Pricing Strategy
Hourly pricing, also known as rate-based pricing, is commonly used by consultants, freelancers, contractors, and other individuals or laborers who provide business services. Hourly pricing is essentially trading time for money. Some clients are hesitant to honor this pricing strategy as it can reward labor instead of efficiency.
Skimming Startup Pricing Strategy
A skimming pricing strategy is when companies charge the highest possible price for a new product and then lower the price over time as the product becomes less and less popular. Skimming is different than high-low pricing in that prices are lowered gradually over time.
Technology products, such as DVD players, video game consoles, and smartphones, are typically priced using this strategy as they become less relevant over time. A skimming pricing strategy helps recover sunk costs and sell products well beyond their novelty, but the strategy can also annoy consumers who bought at full price and attract competitors who recognize the “fake” pricing margin as prices are lowered.
Penetration Startup Pricing Strategy
Contrasted with skimming pricing, a penetration pricing strategy is when companies enter the market with an extremely low price, effectively drawing attention (and revenue) away from higher-priced competitors. Penetration pricing isn’t sustainable in the long run, however, and is typically applied for a short time.
This pricing method works best for brand new businesses looking for customers or for businesses that are breaking into an existing, competitive market. The strategy is all about disruption and temporary loss … and hoping that your initial customers stick around as you eventually raise prices.
(Another tangential strategy is loss leader pricing, where retailers attract customers with intentionally low-priced items in hopes that they’ll buy other, higher-priced products, too. This is precisely how stores like Target get you — and me.)
Premium Startup Pricing Strategy
Also known as premium pricing and luxury pricing, a prestige pricing strategy is when companies price their products high to present the image that their products are high-value, luxury, or premium. Prestige pricing focuses on the perceived value of a product rather than the actual value or production cost.
Prestige pricing is a direct function of brand awareness and brand perception. Brands who apply this pricing method are known for providing value and status through their products — which is why they’re priced higher than other competitors. Fashion and technology are often priced using this strategy because they can be marketed as luxurious, exclusive, and rare.
Project-Based Startup Pricing Strategy
A project-based pricing strategy is the opposite of hourly pricing — this approach charges a flat fee per project instead of a direct exchange of money for time. It is also used by consultants, freelancers, contractors, and other individuals or laborers who provide business services.
Project-based pricing may be estimated based on the value of the project deliverables. Those who choose this pricing strategy may also create a flat fee from the estimated time of the project.
Value-Based Startup Pricing Strategy
A value-based pricing strategy is when companies price their products or services based on what the customer is willing to pay. Even if they can charge more for a product, they decide to set their prices based on customer interest and data.
If used accurately, value-based pricing can boost your customer sentiment and loyalty. It can also help you prioritize your customers in other facets of your business, like marketing and service.
On the flip side, value-based pricing requires you to constantly be in tune with your various customer profiles and buyer personas and possibly vary your prices where your customers vary.
Bundle Startup Pricing Strategy
A bundle pricing strategy is when you offer (or "bundle") two or more complementary products or services together and sell them for a single price. You may choose to sell your bundled products or services only as part of a bundle, or sell them as both components of bundles and individual products.
This is a great way to add value through your offerings to customers who are willing to pay extra upfront for more than one product. It can also help you get your customers hooked on more than one of your products faster.
Psychological Startup Pricing Strategy
Psychological pricing is what it sounds like — it targets human psychology to boost your sales.
For example, according to the "9-digit effect", even though a product that costs $99.99 is essentially $100, customers may see this as a good deal simply because of the "9" in the price.
Another way to use psychological pricing would be to place a more expensive item directly next to (either, in-store or online) the one you're most focused on selling. Or offer a "buy one, get one 50% off (or free)" deal that makes customers feel as though the circumstances are too good to pass up on.
And lastly, changing the font, size, and color of your pricing information on and around your products has also been proven, in various instances, to boost sales.
Geographic Startup Pricing Strategy
Geographic pricing is when products or services are priced differently depending on geographical location or market.
This strategy may be used if a customer from another country is making a purchase or if there are disparities in factors like the economy or wages (from the location in which you're selling a good to the location of the person it is being sold to).
Startup Pricing Models
Like we said above, these strategies aren’t necessarily meant to stand alone. We encourage you to mix and match these methods as needed.
Now, let’s discuss how to apply these strategies to different businesses and industries.
Pricing Models Based on Industry or Business
Not every pricing strategy is applicable to every business. Some strategies are better suited for physical products whereas others work best for SaaS companies. Here are examples of some common pricing models based on industry and business.
Product Pricing Model
Unlike digital products or services, physical products incur hard costs (like shipping, production, and storage) that can influence pricing. A product pricing strategy should consider these costs and set a price that maximizes profit, supports research and development, and stands up against competitors.
Use these pricing strategies when pricing physical products: cost-plus pricing, competitive pricing, prestige pricing, and value-based pricing.
Digital Product Pricing Model
Digital products, like software, online courses, and digital books, require a different approach to pricing because there’s no tangible offering or unit economics (production cost) involved. Instead, prices should reflect your brand, industry, and overall value of your product.
Use these pricing strategies when pricing digital products: competition-based pricing, freemium pricing, and value-based pricing.
Restaurant Pricing Model
Restaurant pricing is unique in that physical costs, overhead costs, and service costs are all involved. You must also consider your customer base, overall market trends for your location and cuisine, and the cost of food — as all of these can fluctuate.
Use these pricing strategies when pricing at restaurants: cost-plus pricing, premium pricing, and value-based pricing.
Event Pricing Model
Events can’t be accurately measured by production cost (not unlike the digital products we discussed above). Instead, event value is determined by the cost of marketing and organizing the event as well as the speakers, entertainers networking, and overall experience — and the ticket prices should reflect these factors.
Use these pricing strategies when pricing live events: competition-based pricing, dynamic pricing, and value-based pricing.
Services Pricing Model
Business services can be hard to price due to their intangibility and lack of direct production cost. Much of the service value comes from the service provider’s ability to deliver and the assumed caliber of their work. Freelancers and contractors, in particular, must adhere to a services pricing strategy.
Use these pricing strategies when pricing services: hourly pricing, project-based pricing, and value-based pricing.
Nonprofit Pricing Model
Nonprofits need pricing strategies, too — a pricing strategy can help nonprofits optimize all processes so they’re successful over an extended period of time.
A nonprofit pricing strategy should consider current spending and expenses, the breakeven number for their operation, ideal profit margin, and how the strategy will be communicated to volunteers, licensees, and anyone else who needs to be informed. A nonprofit pricing strategy is unique because it often calls for a combination of elements that come from a few pricing strategies.
Use these pricing strategies when pricing nonprofits: competitive pricing, cost-plus pricing, demand pricing, and hourly pricing.
Education Pricing Model
Education encompasses a wide range of costs that are important to consider depending on level of education, private or public education, and education program/ discipline.
Specific costs to consider in an education pricing strategy are tuition, scholarships additional fees (labs, books, housing, meals, etc.). Other important factors to note are competition among similar schools, demand (number of student applications), number and costs of professors/ teachers, and attendance rates.
Use these pricing strategies when pricing education: competitive pricing, cost-based pricing, and premium pricing.
Real Estate Pricing Model
Real estate encompasses home value estimates, market competition, housing demand, and cost of living. There are other factors that play a role in real estate pricing models including potential bidding wars, housing estimates and benchmarks (which are available through real estate agents but also through free online resources like Zillow), and seasonal shifts in the real estate market.
Use these pricing strategies when pricing real estate: competitive pricing, dynamic pricing, premium pricing, and value-based pricing.
Agency Pricing Model
Agency pricing models impact your profitability, retention rates, customer happiness, and how you market and sell your agency. When developing and evolving your agency’s pricing model, it’s important to take into consideration different ways to optimize it so you can determine the best way to boost the business's profits.
Use these pricing strategies when pricing agencies: hourly pricing, project-based pricing, and value-based pricing.
Manufacturing Pricing Model
The manufacturing industry is complex — there are a number of moving parts and your manufacturing pricing model is no different. Consider product evolution, demand, production cost, sale price, unit sales volume, and any other costs related to your process and product. Another key part to a manufacturing pricing strategy is understanding the maximum amount the market will pay for your specific product to allow for the greatest profit.
Use these pricing strategies when pricing manufacturing: competitive pricing, cost-plus pricing, and value-based pricing.
Ecommerce Pricing Model
Ecommerce pricing models are how you determine the price at which you’ll sell your online products and what it'll cost you to do so. Meaning, you must think about what your customers are willing to pay for your online products and what those products cost you to purchase and/or create. You might also factor in your online campaigns to promote these products as well as how easy it is for your customers to find similar products to yours on the ecommerce sites of your competitors.
Use these pricing strategies when pricing ecommerce: competitive pricing, cost-based pricing, dynamic pricing, freemium pricing, penetration pricing, and value-based pricing.