This document discusses pricing strategies for startups. It explains that pricing is important because price decreases have a more serious impact on profit than changes to other factors. It then outlines different pricing models for startups to consider, such as subscription, one-time payment, advertising, and razor-and-blades models. The document also provides tips for startups on determining initial prices, adjusting prices over time, and communicating price changes to customers.

1. Pricing 101 for startups
Martin Reichenbach
Mail: martin.reichenbach@gmail.com
Phone: +49 176 / 8035 4738
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2. About Martin
• beActive München, Founder – www.beActive-karte.de
• becoacht, CMO
• Simon-Kucher, Senior Consultant – www.simon-kucher.com
• University of Munich, Computer Science Diploma
• Various Agencies, Online- and Email-Marketing Manager
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3. What is pricing?
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4. Why is pricing important?
As is
Ceteris paribus
worsening by
New profit (change)
Volume 1m
10%
2.5m (-17%)
Price 10 2m (-33%)
Variable cost 5 2.5m (-17%)
Fixed cost 2m 2.8m (-7%)
Profit 3m
Profit
( Price Variable costs ) Volume Fixed costs
TAKE AWAY:
Price decrease have a
way more serious
impact than changes
on any other lever!
Current situation in
professional B2B
• 50% price too low
• 30% price correctly
• 20% price too high
Startups are worse!
Explanation:
By worsening/increasing your
fixed cost by 10%, the profit
margin drops by 7%
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5. Pricing depend on market situation
- 5 -
Market penetration
Time
Mostly used by startups
Goal: Gain market
share: Additional
propositions,
aggressive price
Goal: Critical
mass: Simple
proposition,
aggressive price
Goal: Increase
market reach:
Stronger
differentiation
Goal: Keep customers,
monetize customer base:
High differentiation, multi-brands,
smart pricing, loyalty models ...
Goal: Get early
adopters: High
prices
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6. Pricing basics – Which model to pick?
Startup-related monetization models
Monetization Model Example User Value Product Complexity End User
buys
Subscription model Freemium: LinkedIn
Limited Free Trial: Netflix
Increases with time Simple to Complex Yes or No
One-off monetization One-off-monetization:
iTunes
Immediate Simple Yes
One-off monetization Money-Back-Guarantee:
SEOmoz
Immediate Complex Yes
Advertising-based monetization (Product
or service is free, revenue from ads and
critical mass)
Facebook Increases with time Simple No
Product is free, but you pay for services
(Engineering as Marketing)
Linux distributions for
Enterprises
Increases with time Complex Yes or No
Razor blade model Printer vs. Ink, Razors vs.
Razorblades
Increases with time Simple to Complex Yes
Portfolio / Product line pricing Large product portfolio,
e.g. e-commerce Stores
Immediate Simple Yes
Feature / Menu-based pricing
(Monetization mainly through add-ons)
Automotive, Enterprise
Software
Increases with time Complex Yes
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7. Pricing basics – How to determine price?
Cost-plus
• Price = (Fixed cost + variable cost) * (1 + Markup)
• Very often used by startups selling physical goods
• Retail examples: Fridges: cost plus 25 per cent / Branded clothing: cost plus 135 per cent / Jewelry: cost plus 250 per cent or
more
Competition-based pricing:
• Prices are based on the current competition, e.g. average across competition
• Often used for service pricing in startups and established companies
Value-based pricing
• Prices are based on perceived value by the user
• Rarely used in a relevant fashion by any company
• Factors for Value based pricing (among others): Convenience, Brand, Fashion & Trends, Monopolies and cartels, Pure
perceived value Supply and demand
Apply discount schemes:
• Volume tiers
• Cumulative discount
• Off-season/clearance discounts
• Cash-Payment discounts vs. payment mark-ups
Ideally you will combine these
three data sources in order to
come up with a meaningful price
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8. Tips for getting your pricing right
Early stage Later stage
- Choose your strategy wisely
• Apply a premium strategy if early in the market and can monetize early
• Apply a low price strategy to penetrate the market
- Aim high
• Reducing prices is easier than increasing
• To users low prices often equal low quality or service
• Avoid shocking prospects by applying new metrics e.g. price per week
• Competitive prices are rather relevant for large corporations
- Apply pricing psychology rules:
• Set up a simple portfolio:
• Silver / Gold / Platinum
• Most users are overestimating their usage, e.g. download size
• Use odd prices to stay under certain thresholds (9,99 rather than 10,00)
• Communicate discounts and user benefits clearly
• Show your prices later in the checkout process if possible
- Do customer research in order to inform your pricing
- Golden rule of B2B pricing (by Bryan Stolle)
• Perceived value (measurable benefits + discounted soft benefits) = 10x
price
• Option for B2B companies: Saved Headcount = 10x price
- Always communicate reasons for price changes
• Price increases: What is the additional value I get? Consider price
elasticity!
• Price decreases: Why do new customers need to pay less then me?
- Consider vanishing value of products, i.e. sell-by-date or
development of alternative products
- Consider dropping products or customers if unprofitable
- B2B specifics
• Use one general pricing sheet
• Enable sales by pre-defining a deal corridor → define starting/list price,
target price (e.g. one their bonus is based upon), floor price
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9. Further reading
http://leanstartup.pbworks.com/w/page/15765232/Examples%20of%20Pricing%20Pages
http://www.startupdonut.co.uk/startup/financing-a-business/pricing/price-your-product-or-service
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