Product Discovery, Inc. » How to Price Your Product and Avoid Startup Pricing Mistakes

Over time I’ve developed a few philosophies for pricing products that I regularly pass on to startups and product managers. The central theme is the same: Validate the pricing and revenue model early in the product development cycle.

If you’re part of a lean startup and you’re getting your early MVP out to customers, you should test price with equal fervor as you test the UI.

I’ve seen startups get to launch before figuring out the pricing model (or worse, launching only to learn that customers weren’t willing to pay enough to support the business model).

Some of my thoughts are controversial. For example, I advise startups and new businesses to start charging customers as soon as possible, even if it’s during a Beta. Yet the standard is to give it away for free before launch. But by giving it away for free, you’re giving up an extremely valuable learning opportunity. If you decide to not charge customers during this period, at least do some trial closes (for example, if you have a business product, put a letter of intent in front of beta customers).

Here are a few more pricing mistakes I see companies make:

Pricing based on your costs rather than on customer value.
Pricing using the same structure as the competition.
Creating an overly complicated pricing scheme.
Believing that a lower price is always better.
Pricing so that lifetime value is lower than acquisition costs.

This is a lesson from my recent course Business Models and Pricing Strategies that outlines more of my pricing philosophies.

Comments

Keith Fenech

on June 27, 2012, 11:43 am

Interesting video and some very valid points, however I cannot agree with the “Charge customers for using your BETA”. Assuming the standard definition, a BETA product is still works in progress and this period should be used to maximize the number of people that are willing to ‘play around’ with your product to find issues and report bugs and suggestions.

I agree that it’s good to get revenue as early as possible, however BETA testers are actually doing you a favour so most of them expect something in return (be it a Tshirt, a discount voucher or even simply praising them with a thank you Email). Definately most of them do NOT expect to pay for an unfinished product.

One should also keep in mind that in most cases users will NOT be comfortable using your BETA product in a live scenario (depends on type of software of course), but expecting them to pay for it would simply create another barrier to entry resulting in a smaller BETA user base.

Jim Semick

on June 27, 2012, 12:30 pm

Thanks for the comment Keith. You make valid points – My thoughts on charging customers early stems from a couple of different areas:

I’ve seen (and worked for) companies that have conducted traditional Beta programs, get testers engaged, only to flip the switch to “Launch” and no one buys. I experienced this first hand a few years ago; the company burned through $10M building the product and conducting a “successful” free beta, only to kill the product after no one bought it once we started charging.

The second perspective is that I’m working with more companies who are developing their products using Agile methods such as Scrum. They are engaging early customers who have a serious enough pain that they are willing to pay for a minimal product (of course, minimal doesn’t mean low quality or unfinished). My general thought is that simply getting a lot of people to use a Beta product to provide feedback isn’t enough and doesn’t prove the business model. Companies need to determine whether customer pain is substantial enough to warrant paying for a product. This goes beyond the traditional beta goals of testing features and uncovering bugs.

I agree with you that there are some cases where customers won’t use a “beta” product in a live environment, especially if it’s a mission-critical business application. But if the market is real and the customer pain is substantial enough, it’s possible to get early paying customers, even before traditional market launch.

Michaelq

on August 3, 2012, 9:59 am

Steve Blank once recommended putting pricing and a credit card auth form right into your squeeze page. This way so you could see whether prospective customers were willing to pay for a service in advance of its release. (before having to commit a single line of code).
If your product is compelling, users will probably exhibit a decent tolerance for bugs. I’ve used (and paid for) several such services just after launch.

on August 3, 2012, 11:28 am

Great comment Michael. Testing whether you have paying customers as part of early landing pages is a great technique. It’s becoming easier than ever to add payment options early on. This also gives early indications of conversion so you can start estimating acquisition cost.

Pricing of new products | The Inspired Product Manager

on April 29, 2013, 10:14 am

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