Kevin Hale - Startup Pricing 101
Summary
TLDRThis talk addresses the complexities of pricing for startups, emphasizing the importance of understanding cost, value, and the optimal price point. It introduces the 'pricing thermometer' concept, explaining how margin and incentive to buy influence growth. The speaker advises startups to pursue value-based pricing, avoid common pitfalls like underpricing, and target early adopters. They also provide practical tips for price optimization and suggest a 10x rule for setting prices relative to perceived value, recommending gradual price increases to find the sweet spot where 20% of deals are lost.
Takeaways
- 📈 Pricing is crucial for startups and is often a neglected area with significant potential for business growth.
- 🔄 Pricing involves a balance between cost, price, and value, which collectively affect a company's growth and customer acquisition.
- 🛑 Startups commonly make the mistake of underpricing their products, which can lead to insufficient margins and financial strain.
- 🤔 Understanding the relationship between cost, price, and value is fundamental to effective pricing strategy.
- 📊 Value-based pricing is recommended for startups as it allows for higher pricing and better manipulation of the incentive to buy.
- 🚀 Early adopters are key for startups; they are less price-sensitive and more focused on the benefits and innovation of a product.
- 📉 Avoiding the 'danger zone' of pricing, where the sales cycle is long but the revenue per sale is not high enough to sustain the business.
- 📝 A simple table can be used for price optimization, tracking conversion rates, sales volume, and revenue at different price points.
- 💡 The '10x rule' suggests setting a price where the perceived value to the customer is ten times the cost.
- 📈 Incrementally raising prices by 5% can help find the optimal pricing point where you start losing 20% of potential deals.
- 📚 Educating sales teams on the value proposition is essential to effectively communicate the worth of the product during sales meetings.
Q & A
Why was the pricing talk highly requested at YC?
-The pricing talk was highly requested at YC because it addresses fundamental principles of pricing that many startups struggle with, and it's a popular workshop that helps demystify the pricing process for innovative products and new markets.
What are the main challenges of pricing for startups?
-The main challenges of pricing for startups include understanding the relationship between cost, price, and value, and how these factors affect growth. Additionally, startups often struggle with price optimization and targeting the right customer segments, such as SMBs, which can be particularly difficult.
What is the 'pricing thermometer' concept mentioned in the script?
-The 'pricing thermometer' is a concept used to understand the interplay between cost, price, and value. It helps in identifying the gap between price and cost (margin) and the gap between price and value (incentive to buy), which are crucial for driving sales and growth.
Why is pricing often neglected in comparison to other growth strategies?
-Pricing is often neglected because many are afraid to touch it for fear of getting it wrong and losing customers. However, optimizing pricing can have the most significant impact on business growth compared to other strategies like acquisition and retention.
What are the two main approaches to setting a product's price?
-The two main approaches to setting a product's price are cost-plus pricing, where the price is determined based on the cost of production plus a markup, and value-based pricing, where the price is set based on the perceived value of the product to the customer.
What are some common mistakes startups make when pricing their products?
-Common mistakes include pricing products too low, underestimating costs, not understanding the value customers place on the product, and focusing on the wrong customer segments, such as those who are not early adopters.
Why are early adopters not price-sensitive and what do they value more?
-Early adopters are not price-sensitive because they value the benefits and the competitive edge that a new product can provide more than the cost. They are willing to take risks to gain an advantage over others, making them a prime target for startups.
Outlines
🔍 Introduction to Pricing Fundamentals
This talk addresses the basics of pricing, particularly for startups and innovative products. It aims to help understand pricing from first principles, explaining why pricing is challenging for new markets, how to optimize pricing, and how pricing affects customer acquisition strategies. Practical tips, or 'pricing trick sprinkles,' are shared to assist in tackling pricing issues.
💡 Common Pricing Mistakes
This section delves into four common pricing mistakes startups make: undercharging, misunderstanding costs, not grasping the value proposition, and focusing on the wrong customers. It explains the stages of a product's life and emphasizes the importance of targeting early adopters who are less price-sensitive and more interested in the product's benefits.
📊 Practical Pricing Strategies
This part offers practical methods for price optimization, such as using simple tables to compare different price points and their effects on conversion rates, sales volume, and revenue. It highlights the importance of avoiding 'danger zones' where acquisition costs are unsustainable and suggests exercises to envision a path to becoming a billion-dollar company.
🔧 Adjusting Pricing for Growth
Focusing on how to align pricing strategies with customer acquisition costs, this section suggests setting prices to reflect 10x the value perceived by customers and progressively increasing prices until losing 20% of customers. It summarizes the key points: understanding pricing variables, targeting early adopters, and organizing proper price optimization to balance sales and revenue effectively.
Mindmap
Keywords
💡Pricing
💡Monetization
💡Value-Based Pricing
💡Cost Plus Pricing
💡Early Adopters
💡Acquisition Strategy
💡Margin
💡Price Optimization
💡Incentive to Buy
💡Pricing Thermometer
💡10x Rule
Highlights
The talk focuses on basic fundamentals for pricing and monetization strategies, aiming to demystify the process for startups.
Pricing is particularly challenging for startups in new markets due to the difficulty in understanding customer segments and optimizing price.
The importance of pricing in a company's growth strategy is emphasized, with pricing optimization offering the highest return on effort.
The 'pricing thermometer' concept is introduced to understand the relationship between cost, price, and value, and its impact on growth.
Two main approaches to pricing are discussed: cost-plus and value-based pricing, with a recommendation to strive for the latter.
Common pricing mistakes made by startups include undercharging, misjudging costs and value, and targeting the wrong customer segments.
The concept of 'early adopters' is explained, highlighting their distinct characteristics and their importance in the growth of innovative products.
A demand-yield curve is used to illustrate the balance between price and sales volume for pricing optimization.
A simple table method for price optimization is suggested, focusing on conversion rates, sales volume, and revenue generation.
The 'danger zone' in pricing is identified, where companies struggle with long sales cycles and high acquisition costs relative to revenue.
The importance of understanding the sales process complexity and its relation to the price point is discussed.
A pricing strategy for different stages of a company's life cycle is outlined, from product development to maturity.
The '10x rule' is introduced, suggesting that the perceived value should be ten times the price, for easy understanding and acceptance.
A gradual approach to raising prices is recommended, starting with a 5% increase and adjusting based on customer response.
The talk concludes with a summary of key takeaways, emphasizing the importance of understanding pricing variables and targeting early adopters.
A call to action for startups to review and optimize their pricing strategies to unlock potential growth is presented.
Transcripts
this was a highly requested talk from
last year or lots of people had
questions about pricing or really
confused it's actually was well
requested both at YC itself that's a
very very popular workshop that we run
and so we're gonna go over a lot of
basic fundamentals for pricing that
hopefully will just help you understand
how to approach your pricing and
monetization from first principles and
then you help you help yourselves same
thing with the landing page lock so
we're gonna go over first principles for
pricing we're gonna go over why is
pricing particularly hard for startups
for people making innovative products
and new markets like why is it extra
difficult how do you do price
optimisation like how do you actually do
it what does that actually look like and
just kind of demystify that whole
process when we look at the challenges
of pricing you start recognizing why
certain types of customer segments that
you're going after are difficult like
SMB and we'll talk a little bit about
that we're gonna talk about how pricing
affects your acquisition strategy it
changes what you can do and what you
cannot do and it's extremely important
because a lot of companies get caught up
doing the wrong position strategy or
wasting too much money use the price is
incorrect and then I'm gonna give you
some rules of thumbs some pricing tricks
just to help make it a lot easier when
you're encountering different pricing
problems I call them pricing trick
sprinkles okay there are three lovers
you can pull to improve growth so in the
last talk I talked about conversion rate
and churn but monetization is actually
the Big Dawg it's the one that I really
like now there was a survey done with
over 500 SAS companies and they talked
about sort of like amount of effort that
they put into each one of these
strategies and the returns that they got
as a result of it now acquisition is
really fun and exciting it's the one
that everyone kind of understands simply
it's like I get more customers I get
more logos gives me more growth
retention of course is about keeping
customers and
zatia is about getting more money per
customer now if you increase just your
efforts or resources by one percent your
work on acquisition usually get a return
of about three point three two percent
in retention it's about six point seven
and when you're optimizing pricing that
gives you your biggest bang for your
buck in terms of impact on your business
yet and it's the one that is most
neglected and I think it's the one that
everyone is so afraid to touch because
they're so scared that if they get the
pricing wrong that they will lose all
their customers now the first principles
the basic idea about pricing the thing
the concept that really opened up in my
head how to think about pricing how to
understand the problems that people are
facing and why startups get it wrong is
to use a concept called the pricing
thermometer and so you have to
understand that when you price something
there's actually like two other factors
at play and so there's a cost there's
the price and then there's the value and
the interplay of in relationship between
these items affects how growth happens
inside of your company now the gap
between price and cost that is your
margin that is your incentive to sell
and so the bigger that gap is the more
you are driven to want to push your
product to your customers to have your
sales people etc this gap here between
price and value is incentive to buy and
the larger that gap is the easier it is
to have your customers to want to sign
up or views your product now to figure
out price there's really two ways to go
about it you either start with the cost
if you know what it is and you figure
out where your price is based off of
that that is called cost plus the other
way to do it is figure out what is the
value of your company or product or
service and then you figure out your
price from that and that is called
value-based pricing
in startups and almost pretty
consistently across all businesses
everyone will tell you you should strive
for value-based pricing it allows you to
charge a whole lot more it allows you to
manipulate this incentive to buy the
problem is because people do not
understand their relationships or even
understand what are their costs and what
are the value that their customer is
going to think about their product they
put their price in a kind of arbitrary
place and they don't know what are the
forces at play that drives it and it
results in four different types of
mistakes
the first one is startups will price
their products too low basically you
consistently under charge is the number
one piece of advice we give through most
startups to fix their pricing and I'll
talk a little bit about why most
companies fall into that trap you
underestimate your costs and the result
is you have a problem where your margins
aren't enough to cover sort of
acquisition you don't understand your
value you don't understand how your
company thinks about the problem that
you're solving for them or how they
value it and either they don't
understand your value or you don't know
how to convince them of the value that
you think you offer and as a result you
can't get the price that you want and
lastly you focus on the wrong customers
that you think man
man if I built a better product and I
charge half the competition I win the
thing is that almost never happens and
the reason is because you as a start-up
you as working on something to create a
new market are working on innovative
products you are focused on the wrong
customers they are not the mainstream
people who are going to look at the
price and make most of the determination
based off of that so this is the sales
and profit over a product's life from an
Shinto demise that's what it's called
all you need to know is that these are
five different stages of a company and
this is what sales might look like over
different stages and what profits might
look like over those different stages
you who are in start-up school you who
are getting seed funding your are in the
first two stages product development
stage introduction you are not in the
growth phase and the thing to keep in
mind is that the customers in the first
two stages the ones that you're going
after they don't look like mainstream
customers that you find in growth and
maturity stages they're not mature
customers they're early adopters and
thing to know about early adopters is
you kind of don't really get a lot of
momentum and growth until you get past
the first two to five percent of
potential buyers of your market these
people in that two to five percent
they're called early adopters and the
thing that drives them it's very
different from mainstream people so one
there's a couple things to keep in mind
about pricing innovative products what
you are trying to do fundamentally is
require users the change to their
pattern to stop doing it the old shity
spreadsheet way and do it in the new
better your way and getting someone to
change their pattern is actually
difficult right especially if they're a
mature person partly because the average
user lacks
information needed and the trust in you
or whatever it is that you're making to
make that change to take that risk
you are entrepreneurs you're comfortable
taking risks your customers are not
entrepreneurs for the most part they're
probably less comfortable taking risks
and so in the beginning you're going
after people who are willing to take a
risk and those are early adopters those
are people who care about benefits above
all else that the highest value to them
is beating their competition
doing something much better and taking a
chance that something new will give them
that edge over anybody else those early
adopters therefore are not price
sensitive if anything if you've built a
better product and you charge less it
looks like you have reputation risk it's
like why is it too good to be true what
is the catch and what will end up
happening is it makes it much longer to
get to not understand this is basically
all price optimization this is those
complicated way that you can try to show
price optimization this is a demand
yield curve and when you have on this
side is different prices and on this
side you have sales unit sales and
basically what you are trying to figure
out when you're optimizing the price
that you're charging your customers is
like basically what is the perfect
balance between how much I charge and
how much sales volume I get and then
your price optimization is basically
that try different prices and then see
what the effect is when I have my
companies optimize their prices they
just use a very simple table you don't
need to try to figure that weird ass
graph basically you want to have a
column that says these are the prices
I'm gonna try and then what is the
result in conversion rate what is the
result in sales volume and then how much
revenue did I generate that's all it is
and so let's say I have prices at these
different price points and I get these
different conversion rates and I get
this sales volume I should immediately
be able to see who the winner is here we
go now the one thing to keep in mind
once we have figured out something like
this what a simple product is that these
areas at lower prices if you can afford
them in terms of your margin or actually
lost opportunities and what you want to
understand about these are these are
what you're going to see if you offer
discount pricing or offer tiered pricing
at different price points another
exercise I like to go with companies
when dealing with pricing is how them
understand is like
are you in a danger zone and so what I
usually do with my companies that I help
have them sort of calculate what would
their business look like or what does it
gonna look like to be a billion dollar
company and usually the rule of thumb
there is to be doing a hundred million
dollars a year in sales and revenue and
so that basically is like what at your
price that you give how many customers
do you need to have to make a hundred
million dollars in that year so let's
have a bunch of different price points
then we know okay great
I need these number of customers in
order to make this formula work you
understand what that looks like at a
hundred dollar price point with a
potential about million users right
this is consumers that's what that
consumer space looks like and you know
what this down here looks like $100,000
here we call this enterprise this area
here is the part that a lot of companies
are in and really really struggle
they're on the struggle bus and it tends
to be SMB these are people who kind of
treat their money like consumers right
but they kind of look like they might be
an enterprise and the reason why this is
such a danger zone is because it will
tend to fit in the wrong place on my
next diagram so let's imagine that this
vertical axis represents a price you can
charge either high price or a low price
for your product and this represents
complexity of your sales process low
complexity to high complexity if you are
having a product that is two thousand
dollars or less and is basically
self-serve then you have something in
this quadrant here and this affects
completely what you can do in terms of
what drives your business what you can
spend on to get that sort of growth that
price point here at $2,000 it needs to
be have almost all marketing be inbound
you can't spend a lot of money outbound
or ads etc
your support has to be completely
self-serve or very very minimal you have
no sales team at this price point you
can't afford it right but conversions
can happen on the same day must be in a
self-serve model transactional so
between two and ten thousand dollars
when you're able to charge this you're
able to have a few new toys at your
sleeves and so marketing now can be
focused on generating qualified leads
your customer support can now offer like
SL A's or you can start paying for
training that people get on boarded and
for sales you can't hire a dedicated
salesperson but maybe you can have an
inside sales rep to sell within
companies are within your customers you
could maybe have an SDR
and you can maybe have someone dedicated
to giving product demos sales cycle here
should not be longer than one to three
months enterprise it's over twenty five
thousand dollars now for marketing you
can start spending things on branding on
building up trust with customers your
support is very very high touched that
you can afford you can do phone support
you can have a customer success person
dedicated to the client and for sales
you're going to start thinking about
sales managers dividing stuff into
territories and having sales engineers
that participate in terms of conversion
and the sales calls these will have a
sales cycle about six to twelve months
this is the garbage zone right and you
know if you're potentially in this and
this is the big wake-up call for you if
it's taking you months and months and
months to close someone but you're not
making a lot of money to cover it you
have a process where your acquisition
costs are just too high for you to be
sustainable and you have to get yourself
out of that problem all of your work
should be towards increasing the
perceived value of your product or
service I'm going to end on a good rule
of thumb so if you are
starting with some kind of price but you
don't know how to sort of optimize it or
figure it out then here's a good place
to get going the first thing is I like
to have things where the value is 10x
the price of whatever it is I'm charging
and I want to have it so that the value
is easily understood to be 10x so for
example if I charge for a product that
is $10 then it should be in terms of
perceived value by my customer that it's
worth $100 to them if they do not
immediately understand the 10x value of
the price it's gonna be hard to get them
to move their incentive the buy might be
too low
once you have any kind of price and this
is particularly important for people are
doing b2b or enterprise sale you should
start practicing raising prices and I
like to just start by raising prices by
5% if you feel really confident jump it
up by bigger numbers if you want but
this is a pretty safe way to do it so
that you can feel comfortable with it
and you want to keep raising prices
until you're losing 20% of your
customers that's about a good balance to
have in terms of understanding that like
I have a good price here I'm losing 20%
of my deals it's not too high it's not
too low
in summary for pricing pricing gives the
most bang for your buck you should work
on pricing if you've never touched the
pricing of your product then you're
losing out on lots of potential growth
understand the variables do you really
understand your cost do you understand
why you've plate the price where it is
and do you understand the value when you
go into a sales meeting or call do you
talk to people and you basically say
it's like I know exactly what this is
going to be worth to you
so when I tell you what the price is
going to be you're going to be like damn
that's totally worth it
go after early adopters remember as a
startup that is who you're going after
so when you are talking to customers and
they are taking a really long time to
make a decision or they're wanting to
have a lot more proof that other people
are using it
are not talking to an early adopter
you're wasting a lot of time on
non-believers go after them first don't
take it personally when these people who
are much more mature aren't ready for
your products they were never going to
be your job is to get through that first
two to five percent of the market those
early adopters care more about benefits
than price so don't under your products
when you have something that is of value
and easily understood to have value get
organized when you're doing proper price
optimisation it's really really easy
don't over complicate things
figure out a bunch of different price
points you want to check understand
sales volume conversion rate and the
revenue that's involved and that will
help you make the best pricing decision
your price will determine your
acquisition strategy if you realize that
your sales cycle or all the things that
you're spending on is way too much for
the amount of money that you're charging
you either need to increase the price or
completely reduce your acquisition
strategy costs use the 10 520 rule set a
price that is 10x that is a tenth of the
value increase prices by five percent
until you are losing twenty percent of
the deals thank you very much guys
[Applause]
you
you
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