Startup pricing strategy is an art and science for early-stage startups. With a wide variety of revenue models to choose from, entrepreneurs can and must experiment with different pricing techniques. As their ventures mature, founders will discover the optimal pricing and market positioning strategy. Clearly, the optimal price will differ depending on whether the intent of the entrepreneurial process is to maximize revenue, growth, or profit margin.
To explore this in the deep-tech context, I gave a talk in 2021 – hosted by Venture Center – on pricing and positioning strategies for early-stage ventures focused on materials, chemicals, and biological sciences.Startup-pricing
For startup pricing strategy, the first step is to understand the business context of the venture. This requires clarity about the type of target customers, the go-to-market channels, and the nature of the offering. Next, entrepreneurs must appreciate the economic context, especially where technology plays a central role. It has been repeatedly observed technology-driven markets exhibit non-linearity, exponentiality, and boom-bust-boom effects. These, in turn, lead to competitive disruption, economies of scale, winner-take-all effects.
The third context for startup pricing is that of the industry value chain, the revenue share of the various players, and the profit pool; the latter being the most important for long-term sustainability. Once this contextual mapping is in place, founders can choose a suitable revenue model and a pricing model based on three commonly used factors:
- Cost of the product
- Price of competing alternatives
- Value to the customer
This can be augmented with more complex pricing techniques such as skimming, bundling, freemium, discounting, etc. At this stage, pricing must carefully consider the scope of the offering and the commercial terms and conditions associated with it. Of course, pricing is closely tied to market positioning. Often, startups position their products and/or companies by comparing themselves with their competitors.
Such comparisons usually involve features and pricing in an attempt to persuade potential customers. However, a much more effective positioning strategy is to show customers how the technical features enable certain capabilities which in turn lead to business benefits. This must then be followed by effective messaging to capture the customers’ attention and communicate the benefits.
Messaging of a product, solution, or service often involves the use of the psychology of persuasion. By invoking human reactions to loss aversion, social proof, respect for authority, and similar psychological factors, startups can effectively influence their customers and cement their market positioning.