Pricing Strategy

Lean Pricing Strategy

Startups often have difficulty establishing a price because they aren’t sure their minimum viable product will have much value. A minimum viable product, by definition, is just a bare bones product. It is simply a very basic program that solves a specific problem. That doesn’t infer that being basic means a minimum viable product is buggy or ridden with problems. Rather, it means that it provides value by solving a problem without the overhead of a lot of unnecessary or unwanted features.

Lean Customer Development

It is very common to read about the features of a product and say to yourself, “I don’t need that, probably wouldn’t use that,” etc. A minimum viable product provides a benefit to the customer, who then can tell you what additional features would make the product better. Those features can be added and released in your next update. Your MVP should address the most important problems customers have identified as priorities for them. It should deliver enough value to justify charging for it without adding on a lot of features that have no real value.

One line of reasoning frequently cited for releasing a MVP as freeware is to get it adopted by a larger group of users, which increases the volume of feedback, which accelerates learning what is important to users. The problem with this approach is that it is often difficult to convert happy users of your free MVP to consumers of a pricey application that may be weighed down with features that don’t appeal to the majority, who were happy with the simpler MVP.

You don’t need a lot of users to support learning, you need just a few good customers who will give you feedback. If you intend to charge for your product, it’s better to be up front about it. It sets the right expectations, raises customer commitment, starts generating cash flow, and lets you start tackling one of the riskier parts of your business model early.

What you charge for your product is one of the most complicated and most important things to get right. Not only do sales keep you in business, but your pricing also signals your branding and positioning. Once you’ve determined what your product is, you need to consider its value to your customers. Here’s one overly simplified approach: Let’s presume that it will save a user an hour each work day. That customer prices his or her time at $50 an hour. That means that your product should have a value to that customer at any price under $50.

The price of already existing solutions create a reference for customers that they will use to rank your solution. It is important to understand what is already available on the market and position your product’s price against it. In the rare case you are actually solving a brand new problem, or don’t have a competitor to reference, you can pick a starting price based on total costs, divided by the potential number of users, and add a healthy profit.

It’s hard to accurately calculate your total costs at this stage, so a basic approach is to calculate your costs to attract end-users to estimate your break-even point, and then factor in the costs of customer service and software support. These costs accrue after deployment of your product, and come directly out of your profit margin. One process some businesses use is to ensure that the lifetime value of your customer exceeds the cost of customer acquisition by a factor of three.

Here’s another little tip: fives and nines exert a powerful psychological effect on people’s perception of value. Just as $1.99 seems much less than $2 in a supermarket, $1,995 seems significantly less than $2,000. There are more hints and tips you can pick up quickly in Neil Davidson’s free e-book on software pricing.

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