The Pricing Mistakes that Start-ups Make

Entrepreneurs are notoriously bad at pricing what they do. What are the typical pitfalls? And why have I included a picture of a seatbelt?

Photo by Ryo Kawasaki on Unsplash

Pretty much every time I look at early-stage SaaS business’ pricing it is almost always under-priced. There are a few reasons for this that I’m going to outline here:

IMPOSTER SYNDROME
Does imposter syndrome play a part in entrepreneurs underpricing what they do? I think it may do. It could be down to the fact that as a first-time entrepreneur, they think that they don’t deserve to be able to charge a premium for their product, or it could be that they know the flaws and short-comings of their nascent offering and they feel they need to discount it.

But the reality is the customer doesn’t care a great deal about you or your hang-ups. They are much more interested in whether it can help them fix something that they need fixing. And, as a customer, even the most established products might not end up doing 100% what they want it to. That’s one of the features of SaaS: it’s never going to be perfectly tailored to their exact needs. If the customer wanted that, they’d go out and build it themselves.

BOOT-STRAPPING MENTALITY
There may also be a sense that, as a boot-strapped business, you can actually afford to charge less. You don’t have highly-paid sales teams, or massive media budgets and as founders you aren’t paying yourselves much. So really, if the business doesn’t need a lot of money just yet, why put off potential customers by being aggressive on the pricing?

The answers to this are: you need the money to grow and prove that the business is viable (and one day you will need to pay expensive salaries); you’ll find it harder to put up prices in the future if you’ve set a very low precedent; and B2B customers are less concerned about the price than you think. The favour you think you are doing them is almost certainly not appreciated by them. And in fact, if you’re too cheap it might actually put them off. Why is it so cheap? Is it because it isn’t any good?

BACKING THE WRONG PRICING STRATEGY
Very broadly there are three pricing strategies you can adopt (actually there are several, but these are the main ones):

1. Cost plus
Cost plus is where you work out the total cost to provide a service and then add a margin to get your cost. If you are a services business this will feel like a natural way to price things as you owe your whole existence to this approach (so long as you are charging more than the people and related overheads cost you to deliver it then happy days). The issue with this for SaaS is that it when you are small the costs will be higher per customer than when you are big. It may require 10 people to create $1m in ARR, but if you get to $10m in ARR, you shouldn’t need 100 people. But more importantly, it doesn’t correlate to the value you are providing the customer (see below).

2. Competition
If there is a lot of competition (tends to happen at the lower end of the market), then pricing competitively is going to be a consideration. But at the same time, if all you are doing is providing a slightly cheaper version of what a competitor is doing, then what you are saying is that you have no unique value proposition. I mean other than being cheaper. But that is just a race to the bottom ultimately. You better work hard on doing what you do as cheaply as possible if you want to win that battle.

Having said that, writing off the need to look at the competition would be disingenuous since customers aren’t idiots and they will know if your pricing is way out of whack.

3. Value-based
This is really where B2B SaaS needs to be. Understanding the value you provide gives you a sense of where to pitch it. Your product needs to do at least one of three things: make your customers money; save them money; or keep them compliant. Anything else is a ‘nice to have’. So once you figure that out, you can work backwards from there. If your product is going to generate an additional $1m in revenue that they wouldn’t have otherwise had, what will they pay for that? 10%? More? If you are going to stop them from getting fined, or spending hours and hours manually trying to comply with the law, what is it worth to them if you can remove that headache?

BELIEVING THAT PRICE IS THE MOST IMPORTANT CONSIDERATION FOR CUSTOMERS
If you look at the reasons prospective customers tell companies why they decided not to buy from them, price is a factor but only in a minority of cases. In fact, a good rule of thumb, is that if about 10% of people reject you on price, then you’re probably not far off the right level. But there is a lingering belief that price is the main driver and if you can offer a discount or an increased free trial period, then that will automatically unlock more sales. This can especially be the case when inexperienced sales teams are trying to close a deal. They may reach quickly for the discount button even when the customer hasn’t asked for one or has expressed objections about something different.

In reality, businesses are more worried about what the product does than what it costs (within reason). There may be a pressure for people to compare prices if there are a lot of you doing the same thing and there may also be a pressure to keep prices under a certain threshold where someone has been allocated a budget, but in my experience, for B2B, putting up your prices 5 or 10% has virtually no impact on demand. If anything it screens out the time-wasters and quick-churners.

NOT UNDERSTANDING THE DIFFERENCE BETWEEN CORE, PREMIUM AND ADD-ON FEATURES (and how that all impacts on willingness to pay)
This is probably not one that can be adequately explained in a paragraph or two. The main concept is that all of your customers will care about the core part of your service, but some of your customers won’t care about all of your features and won’t want to feel as if they are paying for something they don’t need. Whereas others might see a feature as absolutely essential to what they need and be prepared to pay significantly more for it. You need to work out which features fall into which.

Think of a car: nobody would expect to pay extra for a seatbelt because they would expect that to be a core part of the product - offering seatbelts as an optional add-on would just wind the customer up. By contrast, if the car came with an electric retractable tow-bar as standard, some people might feel like they were paying more for something they would never need. It would always be best to offer that as a premium feature or an add-on, depending on the type of customer and vehicle you were selling. The people who really need a tow-bar would be happy to pay extra to get it fitted by the manufacturer before they drove it away from the showroom.

For a much deeper look at pricing strategy and its significance, I would recommend downloading this free SaaS Pricing Strategy Guide from Price Intelligently. It’s not a short read, but if you want to get your head into it, it’s not a bad start.