Avoid 'Middle Aisle' syndrome with your startup pricing strategy

Many startup founders lack confidence when it comes to setting the price point of their offering, immediately jumping on let’s offer a discount as we’re a startup, rather than looking at the value their innovation will bring to customers. Last week I took one of my founder clients to Aldi to observe their value proposition and pricing strategy and reflect upon her own thinking.

Aldi? Between you and me, my focus was their infamous ‘Middle Aisle’: one-off bargains for loyal, eagled eyed customers, or junk flogged off to anyone who will buy it? I used it to illustrate the good, the bad and the ugly of having a clear proposition, target customer personas, and a defined pricing strategy.

The ‘Middle Aisle’ contains a random range of discounted homeware and lifestyle products which offers the opportunity for impulse buying - part of their sales and pricing strategy. Aldi has made impulse part of their shopping experience via the bargain bins, and it has helped them grow at pace - in London, Aldi is building a store that has a shopable footprint the size of Westminster Abbey.

The ‘Middle Aisle’ is a place of surprise and delight, worth visiting just for the entertainment of its sheer random collection of items piled haphazardly, telling shoppers they are in a place where prices are at absolute minimum. In this context, every item you don’t buy is a missed opportunity. Customers must explain to themselves why they would allow such incredible savings to slip through their fingers.

It was for this reason that I spent an hour with my client lurking in this twilight zone. I caught sight of a boxed collection of bulbs, batteries, and fuses for just ￡18.99, trying to think of a reason why I’d need it. There was none, and I put it back. A fellow lurking behind me grabbed the set quicker than a seal snatches a lazy cod in the shallows.

The ‘Middle Aisle’ products are designed to look like loss leaders, tempting customers with bargains on items they didn’t know they wanted. I sauntered past tents, a range of Italian spices, hand-held vacuum cleaners, multi-packs of socks. Later I went online and found products that looked identical available for the same price or less. The one exception was a paddling pool for small dogs, which you should snap up from your local Aldi if you’re in the market for one.

I said to my client, this space was a great example of a confused offering and lack of a coherent pricing strategy. The price of everything and the value of nothing – an Oscar Wilde quote, the essence of which is that it’s useless knowing the monetary price of something and not understanding the non-monetary value to your customers - the startup’s challenge.

A business is defined by the value it creates for customers, yet many startups seek to capture customers with headline free trials and discounts. Immediately they undermine the value they seek to create – or don’t even attempt to articulate their value proposition, and default to a cost-plus pricing model - take all your costs and add your profit wish. Pretty simple. Pretty awful.

Startup pricing is more art than science. Startup pricing requires a willingness to have a bold dialogue with potential customers. Each conversation is another signal telling you if you’re moving in the right direction. There are a number of bad habits and pitfalls to avoid, for example:

• Prices are developed without customers You can’t figure pricing out without engaging customers. All the answers are in your customers’ heads not in your spreadsheet, so engage with them.
• Prices are set in stone, not in motion Founders often pick a price, get early confirmation, and declare ‘this is the price we’re taking to market’ but then get nervous and end up with a series of discounted prices as they seek to close deals. Your strategy should be to pick a pricing starting point and stick with it for a sufficient period of time to provide validated learning.
• The price is too low Even confident founders price low. Instead of letting the market tell them where they’re not going to win deals, they price low. Founders talk themselves into the low-price side of the pendulum - already capping revenue growth.
• Free trials ‘Free’ and ‘Discounts’ are two are my major bugbears. Many startups offer ‘free trials’. Instead, why not implement a Freemium strategy for a period of time? With free trials, you are putting the onus on time. With freemium, you get the opportunity to create an ongoing acquisition model, to unlock lower CAC and fill the top of your funnel.

Price differentiation is the key enabler of growth and shapes the customer’s perception of value, so be prepared to lose sales at the wrong price. My new product pricing strategy is based on using Ideal Customer Profiles (‘ICP’) and generate data about them that validates pricing.? How does this method work in practice? Here’s a four-step approach.

Step 1: Define your ICP The first step is to define clear customer profiles, data-driven role models that represent a customer segment. A good buyer persona describes the potential customer, the way they would use your product, their motives and buying behaviours. Let’s take the example of a CRM cloud-based solution.?

• New Business Nyree is a smart freelance marketing professional, who wants to move fast, using the latest marketing techniques, automation tools and data. She is canny though and wants a deal.
• Idiotic Ian is a sales director in the hotel sector, wants an easy life and has budget. He has a rolling contact programme to all customers, but no view on lapsed customers, spend profiles or ability to segment the customer base.
• Hard Working Harry is an old school sales manager, farms his network and lives on face-to-face meetings. He relies on spreadsheets built over the years, with two members of staff keeping them up to date.

These hypothetical customer identities will enable you to recognise different buyer behaviours and motivations to feed both marketing and sales strategies.

Step 2: Why will they buy from you? What’s the problem you’re solving for each persona? Assess what value your product or service provides to the personas identified. Features and benefits should be tuned to different customer profiles, then priced accordingly:

• Nyree needs a CRM to track a targeted number of customers and prospects. The CRM provider could offer a paid trial version for three months, showing an efficient and integrated approach to her marketing efforts, giving a dashboard of metrics and a single unified view of each customer at her fingertips.? As Nyree’s customer traction increases, she’ll see the value first-hand and will switch to a paid account.
• Ian He has thousands of email addresses on his database. Ian needs educating in the value of automation and data. Ian has an established business and is therefore able to pay, so a price point based on cost savings and revenue growth would be relevant.
• For Harry, an initial consultancy project to create the business case to buy is needed, showing the benefits of cloud re security and integration with his accounting. The price point here should help build adoption - taking his two staff from sales admin roles to outbound sales navigators, using data for prospecting and lead generation.

Step 3: Validate the pricing by customer profile – experiment with hypothesis After defining buyer personas and their needs, the next step is to validate the pricing for each. The ultimate form of price validation is of course a paying customer, but what if you do not have a product or service to offer yet? How do you validate your pricing in this case? Start by checking out competitor pricing. Which features do they offer for which prices? Which needs of which buyer personas do they address? Where are you different?

To support this pricing experiment, set up a landing page with a clear call to action. Have your website visitors sign up for different plans offering different features and prices that match your buyer personas. Experiment with both prices and features and track the conversion. One result from this experiment maybe be that you find out a certain buyer persona is not worth investing in.

Step 4: Launch a value-based pricing strategy Having defined your buyer personas and validated the pricing feedback, you understand who you are selling to, and the perceived value of your offering, so apply your pricing in a way that clearly demonstrates this. Don’t sell your offering, sell the outcomes to validate your price:

• Features – highlight your product innovations that deliver new outcomes compared to competitors.
• Benefits – this is what it will do for you (specific to the persona).
• Impact – the financial returns (outcomes) you will generate.
• Evidence – proven from pilots and testimonials.

Just to be clear, I'm using the term ‘value’ to mean the positive financial impact of the product to increase revenue or decrease costs, rather than the hustler's definition as ‘we’re great value, the lowest-priced product.’

This approach secures a willingness to pay for your product as it clearly aligns with the customer’s needs, you’re charging for value metrics you have validated with them for the problem they have, you have a genuine user understanding. By placing a premium on their opinions, you are focusing on the right people for your product who are making the buying decision. After all, value is in the eye of the beholder.

Summary

For me, key considerations in a startup’s pricing strategy include:

• Establish a pricing strategy and make it a core component of your thinking; apply it confidently and consistently, don’t set it and forget it, stick to it to enable validated learning. Pricing is the moment of truth, a key customer touchpoint. The moment you make a mistake in pricing, you’re eating into your reputation or your profit.
• Understand what are you really selling, what are your customers really buying? A florist isn’t selling flowers, they’re selling love. Don’t get stuck by pricing in articulating your value proposition - money is the applause, not the reason you’re here.
• The most critical input for your startup is the voice of the customer, not your product. Develop a value-based pricing strategy to get on the same side of the table as your customers. The customer determines the value. The reason it seems that price is all your customers care about is that you haven't given them anything else to care about.
• If you have created an innovative, new solution, you’ve got the leverage to price to win market share from market incumbents. Be confident! Pricing is a signal, a way to message expectations. It can anchor our thinking, but if we’re not careful, it can be an anchor that also drags us down too.

Don’t get stuck with ‘Middle Aisle’ syndrome around your offering and pricing. ‘Loss leaders’ are everywhere in retail. That thinking won’t work for your startup, be clear on your ICP and price on purpose.