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How to set pricing
We spoke to Edwin Flooren, CFO & investor, to discuss how to set pricing.
DISCLAIMER: This interview was recorded and introduced as a lecture for our free online 10 week program, StartupLeap. It has been edited for clarity purposes. Watch the recording for the full conversation.
Over the years Flooren has founded multiple business, invested in several, and acted as an adviser & project manager for startups and corporates. He also acts as a personal and team coach.
What are the most common pitfalls in pricing?
“It’s not easy to get the right price. You have to think about what you offer and eventually you’ll have to get something back. That’s why a freemium model works for some. But you have to find out what your strategy is first. A lower price could simply be an acquisition strategy.”
“First you need to ask what’s my strategy and see if your current funds allow you to get a position in your chosen market. Can you afford a loss in the first year, or the first two years?”
“Then it’s good to find out what works, by finding out what the customer will pay and what are the competitors doing. Find out all the indicators. Eventually you need to find out what pain are you solving and what is it worth. And can I deliver with a competitive price.”
Should startups build an elaborate finance strategy?
“I think it’s a good idea to go by trial and error. Think before you act of course. Don’t do crazy things, just because you can, but test an educated guess. Again, it’s all about finding out what pain you’re solving. Because then you can work with a model that fits the use. There’s always a way back. You can either upgrade your old customers, work with an end date on an agreement, or focus on new customers.”
What timeframe for contracts should startups work with?
“I prefer a year. Do it shorter and you won’t have the money in the bank. Do it longer and you risk having to give back the money. Because, especially as a startup, you don’t know what will happen in the future. Dealing with one year contracts also gives you the opportunity to test different models, like a monthly subscription, with a discounted annual subscription.”
What to consider with regards to pricing when you scale internationally?
“Well, first of all, the customers in a different country, in a different region even, will value your product differently. By talking to your potential customers and researching the market, you will find what they’ve been paying before and how they value you.”
“Then, the customers themselves are different. We work with a pricing model that is based on the size of the organization. Which means, we can’t serve smaller organizations effectively, because it will just get too expensive on both sides. Some of the organizations in countries outside of our home country are way bigger, so the model evolves accordingly.”
“Last but not least, wait as long as possible before mentioning a price. Or you’ll either sell your product for too little or you’ll scare off potential customers. When you find out what could be of value to them, they’re more likely to keep talking to you.”
“And even if you did sell your product cheaply, you can always offer them more features and upsell.”
Do you change your prices based on who you talk to? Or do you use other ways to convince a buyer?
“It’s important for your customers that your pricing is understandable, so it helps to keep your pricing model at least sort of the same.”
“Plus, for some people price is not an issue. All they care about is how does it work, how will this fit into our day-to-day operations. So you can simply use their arguments to use your service to convince the buyer in their organization.”
You mentioned testing a business model. Even though that can be quite challenging working with large corporations?
“You’ll be in a difficult position, definitely. The time to close an acquisition will be long. So for startups who sell to corporates, it’s essential to find a customer who is willing to support you while you’re still a startup. One that helps you think about the value your service provides. Remember, when I said that you can offer your product for free as long as you get something out of it? Well, maybe their knowledge and experience, and a reference, will be worth it.”
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