By Michael Woloszynowicz

By Michael Woloszynowicz

Wednesday, November 16, 2011

Price Doesn't Always Matter

Don't get me wrong, pricing is an important part of a product strategy, particularly in the consumer goods sector, but it doesn't always matter. I see lots of startups wrestling with how to price their newest product, often pricing too low or even taking a freemium approach, all in the hope of acquiring a large initial base of customers.

Because pricing is such a large part of our daily purchasing habits (Groupon?), we have a natural inclination to believe that the it's a major decision for our own startups. The common belief is that pricing follows a traditional economic supply and demand curve, with a lower pricing yielding a higher demand and vice versa. While this is largely true, focusing on this model alone ignores a myriad of other uncertainties facing an early stage startup.

The problem with fixating on price at an early stage is that you're bound to get it wrong. Whether you're wrong on the high or low end is irrelevant, what's important is that an obsession with price can lead to wasted time and energy. Expecting to come up with an optimum price before your product reaches its first set of customers is nothing more than an exercise in futility.

Where energy needs to be expended is on discovering the true barriers to adoption. Price is only one barrier, and within a particular rage it can be a minor one at that. To come up with a list of adoption roadblocks, an intimate understanding of your target market is first needed. A study of your ideal client may reveal any of the following:
  • A high resistance to change, perhaps due to high switching costs from their existing solution
  • No clear way to reach them, perhaps leading to high acquisition costs
  • Technical knowledge barriers
  • Trust, security or privacy concerns
  • There's risk in using your product, will it be hard for them to get out?
You'll notice that if any of the above were to hold true, pricing wouldn't even become a factor in the buying decision. It's these sort of deal-breaking factors that should serve as the focus of your attention at the outset as they can be addressed through product strategy, features, and website copy. The price elasticity of your product is something that can be validated through experimentation and A/B testing once the product peaks the customers interests and any hidden concerns have been eliminated. Until that point, you're safe to choose a value based pricing strategy and move on. Resist the temptation to begin with freemium pricing (unless your type of product is highly conducive to it) as it often fails to give you an indication of your product value in the eye of the customer.

Despite the title, pricing is important for your product in the long-term, but its significance only comes to play if there are no other forces working against you. Focus your efforts on flushing out these hidden barriers to growth and leave the pricing debate for a later date.

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