Pricing models can be powerful growth levers. A bad pricing model will impede growth and can even doom an otherwise promising startup, whereas a good model will capture some of the value that a product creates as revenue and keep growth flywheels humming along.
A startup’s growth may be at risk if it’s too slow to revise its model, especially during times of quickly changing consumer behavior and inflation.
Developing or revising a pricing model is a complex, multidimensional problem. Price is the most obvious element, but there are many others. Getting it right requires input from many perspectives: product, operations, finance and sales, to name just a few.
Here’s a closer look at the questions we ask to begin laying the foundation for a pricing strategy.
5 key questions in our pricing strategy framework
Before we work with startups, it helps to understand where they’re at and where they’re going. Pricing models must address considerations from at least two different viewpoints.
The stakeholders’ perspective:
- Who are the stakeholders who create (or provide) value?
- What is the value being created?
- What are their alternatives?
Pricing models that scale proportionally with value tend to capture more value as revenue and contribution margin.
The business perspective:
- What does it cost to serve customers?
- How does price affect growth loops?
Paying customers want their problems solved quickly and reliably at the best possible price. Companies want to sell their products or services to the largest number of customers, at the highest possible markup. These two perspectives are inherently opposed, and it’s the founders job to find the equilibrium and create a pricing model that balances the needs of the business and its stakeholders.
The first step toward building a pricing model is gathering research and organizing it into a format that can be used to evaluate trade-offs. We advise founders to construct a product journey map that helps them synthesize both the stakeholder and company perspectives in the context of the competitive landscape.
The world changes quickly for early-stage startups. Even for startups that have already taken their product to market, it’s a good idea to periodically reassess pricing models in light of new products and features, or after changes to the competitive landscape.
What to do before creating or revising a pricing model
When founders attempt to release a new pricing model, they’re faced with many challenging questions:
- How can innovative companies price their products in a completely new category?
- How can companies be confident that optimizations to one side of their marketplace won’t negatively affect the other?
- How does one create a pricing model that increases prices in proportion to a customer’s willingness to pay, without appearing parasitic?
These questions and others can be answered by estimating the willingness to pay from three key reference points: