A lot of startups treat pricing as a math problem or, worse, an afterthought. Pricing is as much an art as it is a science, one that relies as much on marketing and psychology as it does on classical economics.
This ALVICK Guide covers strategies that can help you figure out the right price for your product—and end up with happier customers and more profit in the process.
LinkedIn’s decision to package some seldom-used features as high-margin “premium” accounts spawned a business line that now makes almost $250 million a year. At eBay, touting the benefits of a low-cost tool meant the difference between profitability and a loss.
Meanwhile, companies that didn’t properly assess the value of their products and price them accordingly struggled or fizzled out.
Setting a price for a product is one of the most important decisions a company can make. But all too often it’s treated as an afterthought. Startups in particular have a habit of setting their price low to attract customers and never raising it, or keeping a feature free long after it’s clear people will pay.
In theory, setting a price should be a rational economics problem. You have a set supply of a product and there’s a certain level of demand for it in the marketplace. Since demand tends to increase as prices go down, you simply adjust your price until you’ve maximized profits.
Reality is more complicated. Technology companies usually don’t have a finite supply of a product. And while you may spend a lot to develop software or a mobile service, over time the cost to produce additional units approaches zero.
Usually, companies fixate on the gap between how much their products cost to make and how much they charge for them. But you should also focus on the gap between your price and how much value customers think it delivers, a concept known as perceived value.