Sunday, May 26, 2013

Three foolproof ways to price your startup's product

One of the big questions entrepreneurs ask me about is how to price their product.  99% of the time, I tell them that their product is underpriced.  But this begs the question, how should I price my product?

The advice I tends to be very specific to the product and industry.  For example, I urge entrepreneurs (who are very smart and creative) to resist the urge to get smart and creative when it comes to pricing.  Prices are the way they are for a reason, and it's usually a good one.

Pricing "on the nines" (e.g. $19.99 instead of $20) seemed like an arbitrary, transparent, probably ineffectual practice...until scholarly research showed that it worked.

The meta-advice I give is to price the way that customers are used to.  For SaaS, it's per month or per user per month.  For mobile apps, it's a single up front charge.  For hardware, it's a simple purchase price.

So assuming you've figured out the shape of the price, how do you figure out the quantity?  Here are three foolproof ways:

1) Powers of 10

My first shortcut is always to ask the entrepreneur to react to different orders of magnitude.  Would people pay $1? $10? $100? $1,000? $10,000? $100,000? $1,000,000?

Even people who claim they don't know how to price can pinpoint a power of 10 that represents the ballpark price.  A Nintendo game, for example, ought to cost something like $10.  $1 is insanely cheap, and no one would pay $100.  Simple, right?

2) Powers of 2

Once you've established a ballpark, you need to figure out an optimal price.  This technique is taken from Nathan Berry's guest post on A Smart Bear:
http://bit.ly/12WylRI
"I always ask myself, “If I were to double the price (from $0.99 to $1.99), would I lose more than half the sales?”
If the answer is no, then I double the price. Fewer customers can often be a good thing, especially when it comes to fewer support requests. Also, a higher price tends to attract a higher quality customer."
This is great advice.  Whenever one of my guru friends complains to me that his/her speaking schedule is too busy, I simply tell them, "Double the price and cut the number of gigs in half."  I even applied this technique for myself recently.  I'm on my friend Dan Martell's service, Clarity.fm:
https://clarity.fm/#/chrisyeh

When I decided I wanted fewer calls, I simply doubled my price.  If that doesn't work, I'll double it again.

3) Flinch pricing

This only works when you're face to face.  The idea is to keep ratcheting up the price until the customer visibly flinches.  This was made most famous by Oracle.  "The cost is $1,000...per application...per CPU...per month."  Just make sure you're not too obvious about it!

1 comment:

Shalin Jain said...

Very nice and spot on. I would say this is the shortest way to arrive at your price point. However, you always have to consider penetration and mindshare capture part of your pricing esp. if you have unlimited supply of what you have on offer.

I wrote a post on pricing with a lot of examples on how you would price web applications, essentially the different models rather the price point itself:

http://tenmiles.com/blog/2010/04/pricing-your-saas-application/