Editor’s Note: This article first appeared on Inc. here.
An upscale Italian eatery recently tried an experiment. It offered its buffet for $4 to some and $8 to others. Same food, same amounts, only some people were paying twice as much. How do you think that affected those diners’ perception of the food?
Of course, the people paying $8 rated their meal more highly. Similarly, when researchers poured a $90 bottle of wine into a glass and told drinkers the actual price, they loved it. When they told them the same wine was $10 a bottle, they didn’t enjoy it as much.
Common sense dictates that it shouldn’t work this way. But we all know that what we pay has a great deal of influence over how we perceive a product or service. Despite this time-tested truth though, too many startups persist in pricing their products or services too low. Lacking a solid customer base and data, bootstrapped startups are understandably more concerned about getting a product out the door than figuring out pricing. But, they can wind up limiting profits or positioning their products and services as “value” when they could be better off positioning as “premium”.
How premium pricing can pay off
In any business there will be a range of opinions about pricing. Unfortunately, that’s often all there is. In general, companies don’t think about pricing in a sophisticated manner while pricing can have a huge effect on your business prospects, including how consumers perceive your brand, growth, and profitability. The reason non-Ivies like Duke and Notre Dame charge roughly the same tuition as Harvard or Yale, for instance, is because they want to be seen on the same tier. The decision is about marketing, not economics.
My best example of a well-considered pricing strategy is Apple. While Apple’s status as a luxury brand is debatable, its products are priced on the high end. When a new Apple product hits the market, Apple ensures that it has a solid price point. This pricing strategy is based on the idea that Apple products offer something unique and proprietary (its hardware and software design and App Store ecosystem) that competitors can’t copy.
AI-based digital personal assistant provider x.ai has taken a similar approach. Its “anti-lean” pricing strategy, which starts at zero for a low-function version but runs to $39 (professional) and $59 (business), is based on extensive research but also a belief that the company is offering something valuable. In its analysis, x.ai claims that an exec making $90,000 a year would save $700 a month outsourcing meetings instead of scheduling them herself. Seen in that light, this anti-lean pricing is a bargain.
These examples show that pricing should be rooted in confidence. It’s a way of saying “We think we’re offering something special here that justifies the money. If you don’t agree, we’re fine with that.”
The questions to ask about pricing
Getting to that level of assurance means first asking questions like, “What is the value of my product or service to my customers?” and “How is it different?”
Often, startups skip this step. In an analysis we ran last year, we found that half of seed stage SaaS companies consider pricing either right before launching their product or as the product is getting ready to be launched. More than 40% of such companies have never tested or piloted their pricing and a similar amount have never conducted market research to understand how much buyers would be willing to pay.
Lacking confidence behind their decision, most companies low-ball their initial pricing. Some 54% of seed-stage companies charge less than $5,000 a year for the average customer. More established companies tend to charge more.
Lower pricing offers less risk but also less upside. Companies that leave pricing for last often get caught up in a culture of pricing products and services low or putting out a free product rather than thinking about pricing in a way that makes more business sense. It’s time that startups took a more thoughtful approach.