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Pricing 101 for startups

Martin Reichenbach
Mail: martin.reichenbach@gmail.com
Phone: +49 176 / 8035 4738

02-Dec-14

martin.reichenbach@gmail.com

About Martin
beActive Mnchen, 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

02-Dec-14

martin.reichenbach@gmail.com

What is pricing?

02-Dec-14

martin.reichenbach@gmail.com

Why is pricing important?


Profit

( Price

Variable costs
As is

Volume
Ceteris paribus
worsening by

Fixed costs
New profit (change)

Volume

1m

2.5m (-17%)

Price

10

2m (-33%)

10%
Variable cost

Fixed cost

2m

Profit

3m

02-Dec-14

TAKE AWAY:
Price decrease have a
way more serious
impact than changes
on any other lever!
Current situation in
professional B2B

2.5m (-17%)

Explanation:
By worsening/increasing your
fixed cost by 10%, the profit
margin drops by 7%

2.8m (-7%)

martin.reichenbach@gmail.com

50% price too low


30% price correctly
20% price too high

Startups are worse!


4

Pricing depend on market situation


Market penetration

Mostly used by startups


Goal: Gain market
share: Additional
propositions,
aggressive price

Goal: Get early


adopters: High
prices

Goal: Increase
market reach:
Stronger
differentiation

Goal: Keep customers,


monetize customer base:
High differentiation, multi-brands,
smart pricing, loyalty models ...

Goal: Critical
mass: Simple
proposition,
aggressive price

Time
02-Dec-14

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-5-

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

02-Dec-14

martin.reichenbach@gmail.com

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

02-Dec-14

Ideally you will combine these


three data sources in order to
come up with a meaningful price

martin.reichenbach@gmail.com

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
02-Dec-14

- 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

martin.reichenbach@gmail.com

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

02-Dec-14

martin.reichenbach@gmail.com