[Friday Learning] Right Price to Write Profits

This article helps startups, entrepreneurs understand importance of communicating the right value to their potential customers with right pricing.

Most start-ups struggles on having right profitable price points for their product or services. Finally results in leaving money on the table by pricing it cheap or price too high & leave customer for compete to grab from market. In both scenarios Start-ups tend to lose. For Start-ups it becomes frustrating after their hard toiling work of creating a product or services offering; then the customer does not see value, they grumble or refuse to buy. If & only if Start-ups can create right pricing then they have better control on their business forecasts & growth planning. Price is what a seller asks & buyer agrees to pay. This simple definition is complex to arrive at. For start-ups entrepreneurs it sometimes makes or breaks their venture. If done right pricing can catapult the business growth. If done wrong then pricing can bring down the business equally fast. There is lot of science, psychology & thinking required before you price the product or services to your prospects. Most start-ups being new ventures they look at their competition landscape & see what everyone is pricing & price the similarly. Start-ups have a natural tendency to go cheap as they are new.

I meet lot of start-ups while they pitch for raising funds for investments. I check for their rationale behind arriving at the magical numbers of pricing for their product or services. I get very different but amusing responses from entrepreneurs. There is very little application of mind done by the entrepreneur.  Most start-ups follow cost+ pricing method. This formula takes no cognizance of market appetite from the potential buyers for the calculated price points. If their product offered is unique, exclusive then pricing designed is steep. These start-ups compromises on sales volume to gain high profit per unit.  It targets to skim the early buyers to recover the initial RnD investments. Some start-ups talk about penetration pricing by entry level price points with the vision of generating huge traction in the market. Few have been busy buying initial customers with crazy pricing to get marquee customer names on their list.When you ask a start-up about profit margin & how they will increase bottom line. Most of them come up with answers about marketing, advertising & selling more which is by spending more money. Rarely one comes up with a strategy to re visit pricing by increasing it to make more profits. Most start-ups entrepreneurs & their sales team will dread with thought of increase in price points to better margin with cost remaining the same. They will have all the answers on if price is increased customers will not buy. Executives always have price problems & price pressures because they are not focused on communicating the value to potential customers.

Start-ups that tend to be smart, proactive on pricing will always put premium on flexibility & promote transparency with pricing that are profitable. I always find & believe that the start-ups that works hard in digging out the right psychological price points are more successful to maximize their sales with increased customer acquisition. Start-ups which tend to attract more value buyers than price buyers are profitable. These start-ups are thus able to command premium price points, favourable emotional quotient, respectable reputation & desirable distinction in minds of their potential customers. In order to arrive at right price points Start-ups have to invest good time to understand their buyers profile with its possible budgets, long term potential value, and his possible compete options.

Pricing is not merely a number game but indicates how the start-ups business is delivering value to its customers. Pricing is powerful word of mouth advertising & messaging medium. For e.g. Let say an ice cream brand announces that with rise of temperature every day the price of ice cream will increase dynamically. Ice cream brand loyal customers will get offended as it is seen trying to take an advantage of heat situation. Let’s flip the communication and push the message that whenever there is a decrease in temperature Ice cream brand will drop its prices. Customer now sees the message as benefit for them and will be happy to remain loyal & also promote the brand. In both the price messaging play a big role. Both object & subjective traits of Price needs to be examined regularly to avoid any erosion of the perceived value in customers mind. Start-ups should constantly experiment with new pricings, offers, discount, bundles etc. With right pricing comes profits then you have privilege to bear margin for error if any unforeseen event happens.

Pricing is very important consideration for buyers too. Expert buyers are on constant look out for a steal deal. I find it irresistible to mention that even many Investors investment in start-ups are overpriced in valuation terms. The Investors emotionally get caught up in the excitement of the irrational acquisition of portfolio investments for namesake purpose. They tend to offer start-ups more than they should.

Finally one line summarizes the importance of value pricing: “How much dollars you will profit or loss will be determined by pricing decision & communication”