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.