StartUp Dilemma 4 – Pricing; OR How to Make Sure You Get Full-ish Value For Your Product/ Service

4 Apr

B2B StartUp pricing

Was reading a blog a couple days ago – this is a consultant who is rightly advising folks to never sell their services for free. As a corollary, one of the 2 newspapers we take, had a front page story on Infosys’ altered pricing strategy. (the other newspaper had a headline on how women now menopause in their 20s – you can see why I perused the Infy article with far greater interest :)).

Brought me to a big dilemma we faced as a start-up – how to price/ how to get client to value your product or service enough/ can you raise price of a service one you set a benchmark to it.

Infact, when we got acquired that was one of the first strategic tasks the new management set before us – raise your cash ring/ increase your profitability/ get us better EBITDA – (as if we didn’t know we needed to do it :))

The issue is – when you just start off, you ofcourse want to acquire clients – this is true whether you have a product or a service. You in general either have a slightly differentiated product/ service – so yours is better/ faster/ cheaper/ does more things than before – or your product/ service is doing something that’s very revolutionary/ disruptive – i.e. no one has done it before. In the first case, the client may be more or less satisfied with their incumbent provider – and if they don’t have an incumbent provider – they have not been convinced of the need for your product/ service. In the second case, if no one has ever done this before, they again either don’t need it, or will not believe that you can do it.

In all cases, the proof of the pudding to a certain extent will lie in the eating. So, you WILL need to introduce some element of promotional pricing – whether it be packaged as a beta client who is pretty much using yr product for free – but in this case atleast with attendant benefits that accrue to u; or introductory offer/ trial offer. Once your client likes your product, or service, you work next at making it more and more indispensable to her – and then I guess raise the price. This is why shampoos offer free satches/ food companies offer free tastings (I LOVE to visit supermarkets etc on weekends only because of all the yummy free food 🙂 – my kids are now as bad as I am/was!). In a related way it also why Gillette prices razors low, and blades are where they skim the cream. But trial/ sample has been an entry strategy for FMCG products for a long time.

food tasting

Talking of betas, when we were trying to develop an NLP engine for our Social Media platform, we contracted another start up to develop it for us – we were in a slightly “4-yr-old-is-bigger-than-1-yr-old” type of “elder brother” syndrome fashion, their beta customer. I think we got a LOT of value out of them – just as they got a LOT of thinking out of us. And yes, despite having got them (or them having got us) to a point of really good results that we felt we could use in our platform, we never ever allowed them to raise their prices on us! Talk about arm twisting!

So how can you apply “sampling pricing” to B2B products/ services. We had a way around it – for our service which was ongoing – needed everyday/ every week or every month, and therefore could have annuity type engagements, we offered a 3 day/ 1 week trial – for that trial time period, we wd give our clients a taste of the service – we worked it like the full service. Our conversion rates for trials were very high – hence, our sales teams had a great weapon in their armory. Of course, the few instances it backfired on us was when the client needed that ‘essential” service ONLY for that week and took advantage of the trial – but these were fewer. The success of the conversaion also lay on the fact that the targeting and sales pitch for even the free trial had to be very careful – the client had to have “skin in the game” – they needed to invest time and energy going through our output and feeding us back – everyday. When that didn’t happen, we knew the trial wouldn’t convert into an ongoing engagement.

Where this did not work however, was when the purchase was likely to be one time – so a piece of research on a specific problem say. This piece of work, once executed, would not be done again – if you gave it free, you essentially had a huge opportunity cost in not being to make money from that product/ service again.

And thus here is where we had the typical start-up problem – in a bid to convince our client/ to get them to start becoming a client/ and to prove to them we could do this, we would invariably end up pricing low – way lower than the true value of the output was. (What decided true value – good question – benchmark what top of the market guy would charge for comparable output – if you have no benchmarks, get proxies. If completely unheralded category – figure out how much its worth it to the client – what is the “cost of abstinence”) Client would buy/ LOVE the results – but then in their mind set the price band at that “low” ballpark. So that future requests came at the same ballpark (hey – u guys charged me 50K lst time, how can u say this is 100K now!) And that wd be a vicious cycle – made much worse when you realized that the same client had switched jobs, and at the new company – good news – wanted you to come and bid for a project; bad news – remembered you had charged the low/ breakeven price the last time and then weren’t able to jack it up.

In a product, the scenario is easier – specially if u sell a licence version, you can threaten to cut off licence/ revoke passwords etc once hooked (that’s why it is generally more profitable to run a product company – apart from the fact that you make one product and sell it multiple times, you also know that once your client has your product, cost of switching is high, and your licence/ royalty fees goes on for a long time) – so you could even have an escalating price menu. (not if you are beta though – as evinced by our NLP vendor situation)

So, coming back to the dilemma yes or no to “free/ trial” price? My answer – actually I don’t have a great one (given that even after acquisition we struggled with this). But, I can enumerate scenarios in which it makes sense to sell free trials/ price low:

Product_Life_Cycle

a) Evangelized product – You need to prove the very efficacy of the product category – in PLC terms, its a category at the introduction stage (you milk it at growth and early maturity – by late maturity you are in the Infosys state – fighting to uphold revenues/ market shares in a commoditized environment)

b) Recurring service – like FMCG/ our daily reporting service, the use cycle is short/ frequent, once bought it will need to be bought again. So, you can “bait” the client (not traditional “bait and switch” usage here i might add) with examples of your work, and then withdraw the service if they don’t pay.

c) Competitive market – When you don’t really have a clear differentiator (well, ideally then you don’t have a business being a startup 🙂 ) in the idea – maybe only in the execution of it, or in the commercial structuring; you give the client a chance to “eat the pudding” for the proof of the eating

d) Large potential client – entry in your roster

In most of these scenarios, you have to be clear you are stating upfront that this is trial pricing for a limited time period only – maybe you even use artefacts like price cards per wish list but give stated/ obvious doscounts for stated/ obvious benefits.

Reminds me of an old boss Rajeev saying (for a very different product category) – when would you advertise your price – we are talking mainstream advertising for a semi durable product – a) either when you have a really low priced product – so u want to say “lowest price/ unbelievably low price”; or, when you have a really high priced one – and the price then is part of the indicator of the value of your product – so, like a lot of the posh/ snooty real estate projects now say – “if you cant pay over a million dollars, don’t even think about looking at this villa housing project!” In either case, your price is making a statement!

Read also an old interview about the 5 Rs. )(10 cents now) price point and its utility for FMCG products in India – I think this has become 10 Rs. now actually)

Having said that, when it comes to the crunch – i.e., the fight between getting revenues on yr ticker board vs getting higher commissions for higher sales (kind of like the “singles vs. sixers” problem in cricket) – it takes guts n balls to not remember the few additional salaries you will be able to pay with whatever the client is willing to give you; and really dig your heels in for the true value of your service!

It is a brave entrepreneur who manages to get his/her wish list price even 30% of the time with the first few clients 🙂 – so, if you manage it, kudos! And if you don’t, try try again 🙂

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2 Responses to “StartUp Dilemma 4 – Pricing; OR How to Make Sure You Get Full-ish Value For Your Product/ Service”

  1. alivetheory May 22, 2013 at 10:14 pm #

    A really good read 🙂

Trackbacks/Pingbacks

  1. StartUp Dilemma 5 – Office/ Second Office Timing | joshsang - July 12, 2013

    […] It reminded me of the pressure we faced from our largest client to open alternate delivery locations. (they were like 15 – 25% of our total size at various parts of our life cycle; they were also responsible for pretty much kick starting our third service division – and for enabling scale in our ops. The flip side of all of this was, they had us by the sh$rt and curl*@s, and knew it – so would behave accordingly). Anyway, every year, we would renegotiate the contract – every year he would force us to drop prices – to be fair to him, he did align it in most cases with scope drops – By the end of 5 years, we had dropped the like to like price by nearly 80% of original. (for a refresh of pricing dilemmas of startups, look here) […]

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