Pricing the Customer Experience: Spotlight on Startups
New ventures have an advantage over large firms. They are typically closer to the customer. The entire organization lives or dies based on traction with the initial buyers. It is everyone’s job to know how to build a product or service that attracts customers and creates loyalty. Yet startups often struggle with how to price their product. They think about margins when they should be thinking about value.
Pricing should be determined by the customer experience, not cost. It is a value proposition to be defined and marketed by the business in the community in which it operates. The touchpoints of a product or service in this community influences the perception of value. Touchpoints typically include: end user, buyer, competitor or substitute, complement, supplier, partner, and influencer. Sometimes these categories are distinctive, but often they are interconnected in a web. These relationships are a source of potential revenue streams and operating partnerships as they generate value.
Pricing is a hypothesis to test and refine with customer knowledge. It is optimized by segmenting customers based on their buying process and usage. Field data can be collected to ascertain customer impressions, substitute and complementary offerings, and ease of purchase and use. Pricing should reflect evolving customer knowledge and changing needs. It should be flexible, transparent, and not too complex. Pricing tells a story. It is central to branding and must be aligned with operations strategy and the cost to deliver.
There are various pricing strategies to try depending on company objectives, competitive positioning, and cash flow.
Pricing strategy works best when the customer is part of the exploratory process. Big companies spend considerable resources on data analytics, machine learning development, and customer focus groups to figure out how to sell their existing products to targeted markets and to develop bestsellers.
A great new product or service offering to solve a problem gets traction only when the customer is made aware of the need, the product offering to solve it, and the benefits of the solution as identified and quantified for the buyer. It is reasonable to ask the customer what it is worth to solve their need and what would be too expensive. This information, even if fragmentary, can be used to estimate a working price band.
A flexible pricing strategy and sensitivity analysis are critical, but often neglected, elements in determining the lifetime value of customers. Responsive and tailored pricing increases the ability of a company to serve an expanding market of customers at a cost less than their value. It is imperative that business and financial models reflect the pricing sensitivity of forecasted revenues. This can make the difference between survival and bankruptcy, even with a loyal customer base for the product offering. Know your community of customers, talk to them regularly, and watch your cash flow.
Joy Fairbanks evaluates early stage startups, advises founders, and creates programming for startup incubators and accelerators globally.