Startups fail everyday because they don’t use the right pricing model for their product or service.
The wrong pricing model can cause a company to lose not only money, but valuable human and trust capital, and ultimately, force the company to shut down.
You need the right pricing model in a startup to survive, but you also need it to remain viable.
Why Pricing Is Crucial To The Success Of Your Startup
When starting out, you will most likely make mistakes with your pricing model. Everyone does. The equation of What You Do x What You’re Worth can be difficult to crack.
You must evaluate and adjust quickly, because pricing is extremely important to get right early in the game.
A bad pricing model will affect your conversion rates, your sales and cause you to leave money on the table without realizing it.
Select The Right Data To Determine Your Pricing Model
First, there must be an underlying structure for the initial pricing model.
To get the right information, you can talk to other founders or other customers, or your customers and see what they would pay for it.
If they say they were going to pay for something, get them to actually pay for it.
Test your pricing model in the market by validating how much someone is willing to pay for your product or service.
You may be surprised by the results. To deliver the most value, increase and strengthen the product offering, and then proceed to sell it to customers.
The Advantages Of Subscription Based Pricing Models
Subscription based service pricing offers convenience to customers, and also ensures that they will properly integrate you into their workflow.
Recurring clients will get more value, and you get recurring revenue as clients continue to buy from you.
The ideal model involves a product that has marketing vitality and recurring revenue.
However, a pricing model must be fair to the customer while still allowing your company to turn a profit.
You can offer a pricing model that offers affordable packages with additional features available for purchase separately.
Speedlancer has had the best results using a subscription plan that starts as low as $500 dollars per month, allowing buyers to subscribe and use roll over credits for unused funds.
That subscription model works for us, because it allows us to forecast our revenue and accurately calculate the lifetime value of our customers, and it works for the customers because it gives them the most powerful way to use and be productive through freelancers.
Getting to that point wasn’t easy, and it took a lot of research and a lot of soul searching. But it’s worthwhile.
Common Mistakes In Pricing
When working with a new pricing model, the common mistakes include misuse of resources and lack of scalability.
Folks often spend too much time doing too much with too little.
Entrepreneurs overload the services they offer people, or they undercharge, and spend time trying to prove their worth. To be valuable, you must offer a service the clients actually want or need.
If you have a product that can only be offered to a limited number of people at any given time, nobody wins. If the price points are low and customer demands are high, that’s not going to work either.
Slow growth is an indication of a poor business model rather than failed attempts at customer acquisition. Remember, if you have a steady flow of growing leads, it won’t hurt as much if you don’t have recurring revenue.
How Do You Measure The Success Or Failure Of The Pricing Model?
Speedlancer started by offering $50 tasks worth about 4 hours of work, but the model was not actually adding enough value to its customers. They would purchase one or two tasks, and leave or come back. The price was low, and the purpose was limited. This model did not maximize Speedlancer’s true potential to offer high value services.
Once Speedlancer implemented the “bundle process”, it was able to deliver more value to clients who had long-term goals and higher budgets.
Now, the bundle process is supported by the concierge partners at Speedlancer, which results in a high level service with an impressive finished product.
Final Thoughts
A successful business is usually built upon is testing and perfecting its pricing model – don’t be afraid to use the data and make the necessary adjustments to your pricing model as your business grows!
[This post by Jon Westenberg first appeared on Medium and has been reproduced with permission.]
