One of the most important decisions you can make in your start-up is what to charge for your product or service. I was recently talking the team at Barre Base, an awesome and novel fitness regime that is making a splash in Dunedin and the team is looking to take it further. From that convo I realised price setting is something every start-up has to do at some point and it is pretty tough without guidance. Deciding on price and price structure is pretty complex … like there has probably, definitely been people who have done PhD’s on how to do it. In no way do I suggest that this blog post will tell you what price your product or service should be, but when you’re in a start-up the most important things are doing and learning. So if you want to choose a price and get on with it maybe my thoughts in this can help a little bit.
Setting your price is something that needs to be considered from different angles, but is often left to the person with the most financial knowledge or the person who does the market research.
They will take very different approaches. The classic finance approach is cost plus profit margin – ie work out what it costs to make the product and add a percentage on top to enable the business to be sustainable (or ideally make ridiculous amounts of money).
The market approach considers what the product is worth by looking at the cost of competing products and asking the potential customers what they are willing to pay.
Each of these approaches is important. The finance approach will consider whether the business makes money – obviously you don’t really want your business to go under so that’s pretty important. But the market approach considers whether your product can be sold at a certain price which is also a critical consideration – because if no one buys it then you don’t have a business either.
So what happens when they conflict? Obviously if the market approach returns a higher price point than the finance approach you are pretty sweet and set to go … but if it doesn’t? What happens when your financial dude says you have to charge a price that you know the consumer won’t pay … can you still make the business work?
At SuchCrowd one of the things we consider is how more value can be added without decreasing the profit margin. We are always thinking – how can we make our service worth more without making it cost more to produce.
As a SaaS (software as a service) business, this is uniquely simple. We aren’t like a tangible product where generally if you add something it costs more to produce. We have the awesome advantage of being able to add more features to make the product worth more (we are lucky because we have an awesome developer on our team). There is a danger of moving into ‘feature creep’ (where you add features that don’t get used). To avoid this always consult the market and consider – ask, does this add value? Does it make the product worth more?
I’m excited for this year, SuchCrowd has rolled out our event planner dashboard. We currently charge 5% on ticket sales of events that are successful, putting us on par with Indiegogoand Kickstarter (international crowdfunding websites). Our event planner dashboard brings the event management side of our website close to adding as much value as other ticketing systems. SuchCrowd is not a ticketing system, but this is something that adds value to our customers as it gives them more information to help with promotion for their events. Ticketing systems generally charge more than 5%. This means in the future we may be able to charge for our ticketing system. We would also give people the choice to use another ticketing system instead as this is something that is needed to make sure we don't lock ourselves out of certain events or venues that must use particular ticketing systems. It’s exciting times and it all comes from a great team working together to ensure our product has value that matches the price being charged for it.
Some tips for setting prices from what I’ve learned at SuchCrowd:
1. Look at what competitors charge
For me this is one of the simplest and best ways to price because it shows what the market is willing to pay and also demonstrates a price where a business can make money (just make sure you don’t pick a business that is about to go under!) At SuchCrowd we closely look at crowdfunding websites, ticketing systems and also costs of promoting events offline.
2. Ask your customers about the worth
Your product or service should be helping people achieve something so try and work out what it is WORTH to them – how much money can they SAVE or MAKE by using it? For example – going back to Barre Base, they are looking into licensing their gym classes – so how much money could someone buying the license make out of offering Barre Base as an option for their gym?
3. Look at the costs
Important! You just can’t charge less than it costs to produce … but remember to consider this at scale rather than only one off units. It’s always awesome if you can make profit from selling one unit of something but that’s rarely the case – most of the time you need to consider scale and how the costs increase in relation to the revenue … remember when you consider scale you need to be realistic about how many units you think you can actually sell! Don’t be ridiculous (again looking at competitors is good for this).
And remember ... if it all doesn't seem to be working that doesn't mean you are dead in the water - you just have to think creatively about other value you can add. This is something that will be easier after doing your market and financial research!
Happy price setting everyone!
Some flashbacks to our time at Lightning Lab 2016