Entrepreneur lesson #5: Your offering price is wrong

Few topics lead to such heated debates in startups as the pricing of the offering. There are at least four dimensions that play a role in the discussions: money first or customer first, based on value or cost, premium first or low-end first and direct versus indirect monetization. The first dimension is concerned with the dichotomy between a group that would like to earn back the investment in the offering as soon as possible by charging a high price to customers versus a group that focuses on creating a large customer base as soon as possible by charging a low price, or even providing the offering for free.

The second dimension is concerned with the principle of pricing. The cost-based model assumes that you can divide your R&D cost by the prospective customer base and add some margin to it to calculate the price. The value-based approach aims to assess the value that the customer gains from adopting the offering, eg in reduced effort required by the customer, improved revenue, and so on. The price of the offering is then set as a percentage of the customer value, eg 50 percent.

The third dimension is concerned with customer segmentation. For some offerings, it makes sense to address the premium customers first as these tend to be less price sensitive and care more about early access to innovative, value-adding functionality. In other cases, it can be better to start with the low end of the market as the offering lacks features that more advanced users would demand and take for granted. Customers at the low end of the market, however, tend to be much more price sensitive.