Under-pricing Conundrum in Startups

With experience spanning over four decades in disruptive technologies and strategic business planning, I can't stress enough the importance of getting your pricing right, especially for startups in the tech sector. Far too often, the focus is on gaining a foothold in the market by keeping prices low. Still, this strategy can significantly undersell the value of your offering and set a precedent that takes time to break away from.

Let's delve into the intricate dance of pricing. It's as much an art as it is a science. This was a lesson I learned early on during an interview post-graduation at Plessey. The eye-opening message was clear: the price isn't necessarily tied to the cost; it's about what the market is willing to bear and the perceived value to the customer. This philosophy has been at the core of my pricing strategies for over 40 years.

So, what’s the error most startups make? They undervalue their offerings, often significantly. This isn’t merely a rookie mistake but a deeply flawed understanding of market dynamics. There's a notion among startups that they have to price low because they're new and relatively unknown. This could not be further from the truth. While it's evident that your product is new, what's not so clear-cut is the concept that a lower price will necessarily bring traction and growth.

Customers understand that solution infrastructure, development and operations come at a cost. Product development is expensive, and a certain level of support is required with its price tag. So, what’s the fundamental value proposition of your product in solving customer problems? That's the golden question.

My approach is straightforward – create "no-brainer" pricing, where the Return on Investment (ROI) or Cost of Inaction (COI) is so favourable that the solution practically pays for itself. Think about it; if every pound or dollar spent returns tenfold, it's a win-win. But don't forget to cover your costs. Far too many startups think they can jack up the prices later, which is naive and detrimental to long-term profitability. Sure, you can have a clause that adjusts prices in line with inflation, but that won’t cover a persistent undercharging issue.

The implications of undervaluing your offerings extend beyond immediate profits. Having been part of businesses that have acquired smaller companies, I've observed firsthand the complications arising from these companies under-pricing their products. It raises questions about the pricing strategy of the acquiring company and can necessitate adjustments that customers might need to take better. The worst-case scenario? Your customer starts looking for alternatives, leaving a bad taste that's hard to wash away.

In conclusion, let’s not sidestep the monumental importance of pricing in the larger business picture. Be forthright and consult experts who will tell you what's in your best interest rather than what you want to hear. Your pricing isn’t just a figure; it’s a statement of your product's value and a critical element in your overall business strategy. So, as you continue to scale, revisit your pricing strategy with the wisdom of experience and market understanding. Trust me, this isn't something to be tackled on a whim; it's a calculated strategy deserving of as much attention as your technology itself.

Author

Author

Andy Hamer has been the strategic catalyst behind various B2B technology ventures, covering hardware, networking, services, and SaaS. His influence and expertise are globally recognised with a BA (Hons) in Marketing Engineering and a Fellow of the Chartered Institute of Marketing (FCIM). His career spans senior management and board roles in renowned corporations, including his recent ventures into the Architecture, Engineering, Construction, and Owner sectors.