In Greek mythology, Icarus and Daedalus (his father) attempt to escape from Crete with wings that Daedalus constructed from feathers and wax. Daedalus warns Icarus to not fly too low, lest the sea's dampness clog his wings, nor too high, lest the sun's heat melt the wax. But Icarus flies too close to the sun and he tumbles from the sky.*
In the reality of startup sales, if you price too high then customers won’t buy, but price too low and the business won’t grow.
How do founders avoid falling to the ground?
Costs – Calculate the COGS, salaries, R&D, overhead, and debt servicing to know what you need from revenues to cover your runway. Use this to set minimums in pricing.
Values – Define price in terms of value and how customers can better operate and grow business. Use this to set maximums.
Tiers – Set tiers of prices (e.g. basis, plus, and premium options) to attract both price and value-driven clients.
Choice – Offer a selection of different products, features, and/or services at different prices allows customers to confidently decide.
Odd Numbers – Recognize that while $9.99 is essentially $10, research shows that lowering price just a little has a huge impact.
According to a study conducted by Kenneth J. Wisniewski from the University of Chicago, when the price of margarine dropped from 71 cents at a local grocery chain to 69 cents, sales jumped by an astounding 222%! So, two pennies are worth a lot.**
Pricing is both science and art. Avoid the fate of Icarus by finding the right medium.
Another, more modern story tells of two chefs in the kitchen fight over the last orange. One chef wants to bake a cake and needs the rind. Another chef is preparing a breakfast drink and needs the pulp. After much yelling and insistence that each one deserved the fruit, a third chef entered and calmly explained that an orange can provide both they need.
Finding win-win scenarios allows your business to grow and profit successfully while customers get exactly what they want, too.
How to Price Effectively so Everyone Wins?
Free Trial – Offer a free trial or sample to demonstrate your value. During the period, reinforce how you can help the client succeed while objectively and subjectively measuring their engagement (behaviors) and feedback (insights).
Calculated Discounts – Lower prices when customers are willing to improve your long-term cash flow (e.g. discounts for large volumes, multiple-year deals, and upfront payments). For new offerings, an “early adopter discount” recognizes the buyer's risk while keeping the full price as an anchor.
Service & Product Factors – Negotiate ways to save costs without badly impacting the client, e.g. quarterly versus monthly reports if the cadence does not matter to the customers. This can be an easy way to increase efficiency and to reduce strain on resources withour compromising value.
Business Considerations – Discount the price if the client will help you grow, such as a co-marketing commitment (e.g. case study) and mutual referrals (e.g. credits for referring new, signed customers).
Find the right price practically and creatively to build a long, successful, and mutual relationships.
Photo by Fabio Brocceri who can be found here: https://www.facebook.com/fabiobrocceri.it