Monetization. Or What is Pricing Strategy and why it’s important to work on it for Startup?

The goal of any startup is to solve clients’ problems, win them by creating a polished product that they would be glad to pay for. Often startup founders think about the monetization for their product as the last thing to build a strategy for and let it slip. But with the best pricing models picked will provide a stable profit which is essential for the startup to grow further. 

In the other words, pricing strategy is what makes your company successful. Yet it’s not that simple, it also can be a risk for the business. This decision will affect and shape the whole brand, marketing. Moreover, it’s not enough to just build this strategy one and for all. Product improves with time, grows, and so pricing can’t stay outdated.

Let’s get to the basics.

What is Pricing Strategy and why it’s important?

Overall pricing strategy is a method to define and implement the best pricing models that would boost the profits for the business and will be convenient for the clients. With establishing the best price for the company’s products and services based on the features, competitors’ strategy, and other factors.

Reviewing all options and factors the company builds its strategy that would maximize its sales and profits. Pricing in this case can be a strategic and tactical weapon.  It is a source of competitive advantage and founders usually forget it not rethinking the strategy with the time.

After defining objectives and planning, startups can use it to achieve larger goals. Let’s review the Apple example. Apple rarely discounts their prices, they are purposefully positioned for everyone to see that its products are ‘premium’. Its products make users feel special and luxurious. 

What you need to know before working on the strategy

A good starting point is to define three key factors about the overall business: who your customer is, what your product offers to them, and what the conditions in your market are/competitor research.

Know your customer

Knowing more about your potential customers, thinking like them can help in picking the pricing methodology and ‘setting’ price.  Can the customers afford it? How would be more convenient for them? Is high price actually a feature, like at an exclusive resort?

Know your product

This is essential to understand how to scale your pricing, adapt it. The main questions you need to ask – How does your customer gains value from your product? This will help you figure out whether you should price per seat, per feature set, etc.

Know your market

Marked if filled always dictates the average price. Learning the market helps understand how much freedom you have to set prices. The more competitors with similar benefits for the clients the more the market will set price for you.

These three aspects forming the groundwork when it comes to any strategic changes. And you will need to research them regularly to understand if the company moving in the right direction.

After finishing with all the above it’s time to look through the existing options. There are actually the psychological aspects too, we will review it separately.

Existing pricing strategies you need to consider.

Cost-plus Model

The company calculates the total development cost of the product often including the cost of design, quality assurance, salary too, and adds the profit margin to determine the cost of products and services.

This strategy doesn’t consider market value, competitor’s price, costumer’s ability and willingness to pay, etc.

Competitor-based Model

This one of the most used pricing strategies. As we mentioned above the market and competitors often dictate the rules by themselves. Yet there’s always the space to wiggle with the features/services that differ.

In the Competitor based model – you basically provide quality products/services at a more affordable price than your competitors. Market and competitor research is the base of this model. 

Value-based Model

This model focuses on the value provided to the customers. Based more on the ‘potential client’ research, their willingness to pay. Yet it requires very detailed work and may require a lot of time to know what customers need and to determine a valuable price to charge.

Penetration Model

In this model, the company prices its products and services lower than its competitors but only to enter the market. In this case, they have the opportunity to attract the customers and win them later not because of the pricing but the actual services. This model will work great for the company which has strong funding in the beginning as initially offering the services and products at a lower price will lead to losses. But, once their products and services are well-known and set a strong foothold in the market, the companies raise the prices to maximize profits without losing much of their customers.

Skimming Model

Pretty much the opposite of the previous model. The company charges a high price for its products/services when launched. It is done in order to maximize profit at an early stage but if there are fewer competitors on the market.

With time the price of the products/services is lowered to attract price-sensitive customers.

Captive Model

Initially offers products and services at a lower price or for free. Then the company releases the latest or premium versions to take advantage of the products and services. In this model, there is no longer a free version so customers have no choice after the trial period ended.

After a certain time or level of usage or when the trial period ends, the customers are convinced to upgrade to premium versions to get additional features and get better value. 

Psychological Pricing Tactics

Customers’ psychology is always affecting the sales so knowing its aspects would be a great addition when forming the strategy. So let’s see some of the psychological pricing tactics that are practiced by different businesses.

Price Anchoring

Simply said near with the pricy items/services others would rather seem cheap even if its cost is higher than average.

The purchase decision of a customer is often affected by the first price he/she sees. So, most of the companies by experimenting with low and high ones see what works best for them.

Charm Pricing

Charm pricing is a well known yet working strategy in which there no round prices like $500, usually all prices are ended with digit 9. Like $499. It works because of the “Left Digit Effect”- our brain processes the left-most digit and makes decisions accordingly choosing the price of $499. Because we perceive $499 closer to $400, not to $500.

Product Bundle Pricing

In product-bundle pricing, related products/services can be combined into a package and offered at a single price. The customers are less likely will compare the individual price of the products and packages.

High-low Pricing

High-low pricing is one of the most commonly used pricing strategies. Initially, the products and services are released at a high price and later the products and services are offered at a low price as a discounted value or in a sale.

OUTLINE:

Startups are challenged by many things from the very beginning – from limited resources to competitive pressures. Pricing is one area where startups have some freedom to shape their personal strategy, but it requires thoughtful research and planning.

It’s easy and common for startups to neglect the pricing in some way, thinking of it’s ‘lower priority’ tasks. It always makes sense to donate some time, make the effort today to understand the components and work required to build a strong pricing strategy. This move will definitely pay off in the long run, making your brand formed and complete.