Selling at a low price means leaving money on the table. Selling at a high price means missing out on potential sales opportunities. How can a startup know if its pricing is ideal, and what does that even mean?

That’s the key question, isn’t it? More likely than not you are not charging as much as you could. Price is rarely the dealbreaker for startups. Just ask yourself whether or not you are regularly being challenged on prices in the negotiations. In my experience, that is most likely not the case.

Now, to set better prices start by defining the customer segments you want to sell to. Start-ups often think too broadly in terms of market, which makes it difficult to focus their attention. It is often a specific property of the product which is most valuable for a specific type of customer. That is what we want to find out and optimize for. Calendly is a simple example – they charge more than the whole Google Enterprise suite because it is super clear why it is valuable, it saves time for busy people – and that is exactly what they are focused on.

Once you know what is valuable to your ideal customer, you can start to think about what it is really worth to them – does it save time, does it bring more revenue, does it prevent risk… This insight will not only help you build the right product in the first place but also extract the right price given your customer’s willingness to pay.

What are the most common mistakes startups make when it comes to pricing?

Lack of understanding of the willingness to pay is top of the list. Many companies just don’t understand their products’ value to the customer well enough which implicitly prevents them from really segmenting out the different types of customers and their use-cases to command the right price.

Second comes the lack of learning about setting prices. In the beginning, pricing is not the most important concern for startups. But once prices are set, people need to remember that they were set somewhat arbitrarily to begin with, for example based on the first couple of deals or similar to competitors. That is a huge missed opportunity. As the product matures, the pricing needs to mature as well or the company risks leaving money on the table. Just like in product development, prices need to be learned.

The third mistake I want to mention is treating pricing as a “business thing”. I often ask development and product teams “What’s your product cost?” and “What’s the value of your product?” It is crazy, but even in small companies, teams often just don’t know. Those are the people who need to create the value that we charge for. So of course they also need to be part of the pricing decision process. Ultimately, the negotiation table and how products fare in the market is one of the strongest signals to the development team. So I strongly recommend treating pricing and packaging as a cross-functional task.

What are the best methods or frameworks to determine prices?

Once you have a good idea of who you sell to and what it potentially is worth to them, it is time to test your hypothesis.

There are many attempts to capture the process of price determination. In my experience, what it really boils down to is experimentation to truly learn how the market receives various price points.

How you experiment depends on the nature of your product. If you have lots of small purchases you can literally just test different price points in an A/B test. For most B2B start-ups that’s not the case, and here you will rely on negotiations. The crucial piece is to treat every engagement as a learning opportunity. If there is high uncertainty on what the value of the product is, I recommend starting high and walking down from there. Be mindful of what is discussed at the negotiation table, it will also have a dense insight into what the ideal product would look like for the customer.

Startups need to make assumptions about revenues in their business plan even before their products hit the market. Are there ways to ascertain the customers’ willingness to pay at this stage?

No. I have been part of many product launches, even with a lot of market insight and existing customer bases and the forecasts are just not very accurate. Just ask any CFO anywhere to take out the predictions from last year by product or feature – typically they are widely off the mark.

I get that everyone wants to know in advance what the returns will be, unfortunately that is just not really possible. Rather, I recommend being clear on what the value is and to whom. If there is strong evidence that there are people out there that need what we are building we will also figure out a way to extract the value in terms of revenue.

Who should be involved in setting prices?

That’s a pretty good question. Most companies leave that to “the business”, a mistake in my opinion. The information on what provides value to the customer is quite adjacent to what we can charge and what we build. In that sense I strongly believe in cross-functional groups to work on pricing and share information transparently.

If it becomes obvious that a startup needs to raise its prices, how can this be done without upsetting existing customers?

It is pretty hard to increase prices after the customer has been anchored. I supported a stellar Product Manager, Ivan Seric, who was working on a B2B SaaS product with exactly this problem. What is critical, especially for less mature B2B products, is a clear initial scope that you can expand from. It is not a good idea to negotiate deals which cover your whole product or platform. Rather, be specific, e.g. “You are paying for our solution that includes feature 1, feature 2 and offline support with 24h turnaround.”

Now, when you create a novel feature 3 the customer values you can offer it as an add-on and increase ARPU. This way you can start with a lower price point appropriate to the initial value and strategy to command a larger user base and then extract value as you create it over time.

Packaging is another good way to raise the price point. When contracts renew, you can just offer your product as a large bundle, for example include additional features and command a higher price point. This strategy worked well for Ivan and his team but you can also think of more visible examples like Netflix – at one point they had a single rate, and now they have multiple tiers including a new ads-supported tier. This way they can extract value across various segments of users and differentiate via better experience across different service levels.

How can startups ensure the feedback from sales teams is considered?

That’s a good one, I actually recently wrote an article about just this question. Sales has just different incentives – typically short-term revenue targets for a certain portfolio of customers or geo-location. Sales is often a very good source of information because they are in the thick of discussing with clients and can share how the product is really doing and what are the main shortcomings.

At the same time, it is often important to consider the whole customer base, especially in pricing and over long periods of time – that is product’s job. Hence, I believe that you need both to co-exist in a bit of a frenemy relationship to get the best results. If product chooses to ignore sales, it typically misses out on crucial new trends and short-term market signals. If sales takes over, it typically leads to too much short-term and individual client optimization.

What is your process to assess a startup’s pricing and product strategy and what are typical recommendations you make based on this assessment?

The starting point is that pricing was never a priority but everyone believes it could be better.

The first question that I try to answer is whether or not pricing is even important at this stage. If you do not have a product yet that is seeing traction – maybe it isn’t. If you are starting to see more and more customers come in and if the value proposition is starting to mature, of course it is critical to extract the value you created.

Pricing is tied very closely to strategy – so we often start by clearly articulating the product strategy to align across the company what it is that we will deliver in terms of value and who we intend to deliver to. If that is set, we start to set hypotheses around pricing and conduct small experiments to test and collect data. That solves not only a profitability purpose but also lets us see if we are building the right thing to begin with.