Menlo Ventures is a venture capital (VC) that specializes in investing in early-stage B2B SaaS companies. Company partner Naomi Ionita advises on pricing strategy, which can be said to be the “lifeline” for startups.
Many startups mispricing their products and services and wasting profitable opportunities.
Naomi Ionita, partner at Menlo Ventures. She previously served as head of product growth and monetization at Evernote and others.
Pricing for value means finding customers who are willing to pay the best for your product or service. And that requires a pricing process—a systematic customer survey.
Startup founders often don’t know where to start when they hit the monetization stage. When I talk to founders, I often ask them how they decided on initial pricing and packaging. Usually, one of these three things is true:
- Improvise:Surprisingly, many companies set their prices randomly. We spend months on product and design, and pricing is treated like an afterthought. Many of the executives admitted, rather embarrassingly, that they “chosen at the last minute.”
- Price low to gain market share:The second method is to deliberately set prices low to get users early in the name of a “land and expand” strategy. The problem with this method is that it keeps the product cheap in both the short and long term. Because in return for user acquisition, low prices make it difficult to increase sales. To be successful with this strategy, you must provide an effective way to upgrade from the free/low-cost version.
- Set a premium price to emphasize the premium of your product:The third method is pricing aimed at premium positioning. In this case, the company sets the price high and does not cut the price even to attract customers.
In its early days, one of our portfolio companies, Envoy, was one of those companies that used a low-price strategy. Larry Gadia, CEO of Envoy, told us about a business meeting he had with Company A in the early days.
At the time, Envoy was charging $20 per month per location. When Company A showed its willingness to purchase and the topic turned to price, Gadia said, “$20 a month… no, $200.” Company A laughed and said without hesitation, “Okay, let’s sign the contract for $200.”
From Company A’s point of view, even at 10 times the original price, the value provided by Envoy was great enough. And Gadia realized that getting a customer’s quick decision means that even at ten times the price, it’s still missing out on a profit.
Pricing experiences like these are great lessons in getting the returns you deserve.
The strategy I describe below is not a guarantee of success. Its success depends on the market, competition, and customer perception of the value the product offers. But in setting prices, it helps to carefully research customer demand and willingness to pay.
VC teaches 3 steps of pricing for startups
1. Clarify who is responsible
First, create a dedicated team to drive pricing and packaging responsibly. I once led a product expansion and monetization team, involving product heads, data analysts, and user researchers to drive pricing and packaging.
Sales, sales operations, marketing and finance are often part of the team when it comes to attracting high-end customers.
Questions to consider internally:
- Customer segmentation: who are your customers
- Value: Why Customers Pay
- Price: how much the customer is willing to pay
You can’t get clear answers to these questions without talking directly to your customers. You might think it’s a dialogue, but it’s definitely worth doing.
2. Communicate with your customers
When interacting with customers, it is recommended to create a team consisting of sales, customer success, customer support, etc. This way, you can involve employees who are on the front line and interact with prospects, existing customers, and churn customers on a daily basis. Give this team the role of the customer conversation about pricing, and have them feed back what they learn to the pricing team.
I’ve seen how helpful these feedback mechanisms are. In fact, customer episodes shared during monthly luncheons with the product team led to revenue-boosting measures that yielded great results.
There is another way to extract useful information for monetization. It is to hear the voice of the customer directly through interviews and questionnaires.
The key here is the way the questions are posed, which should provide actionable insights. With the right research methodology, you can get a better understanding of which features are in high demand, which features are the most profitable, and so on.
First, ask about the value customers perceive. The goal is to figure out what the ideal package would be to offer a customer. Give respondents a list of features and ask them to prioritize each feature. For example:
- Allocate each of the following features 100 points according to how important you think they are (to add up to 100 points).
- Which of the following features are the most and least important to you?
- For each function, please select either “essential,” “nice to have,” or “not necessary.” Also, among the features you answered as “must have” and “nice to have”, which features would you include in your ideal yearly package?
Then there’s the “willingness to pay” question. A commonly used price sensitivity measurement method is called the van Westendorp method. Deriving price as a direct measure of value. Examples of specific questions are:
When considering the ideal package,
- What is the annual price that you feel is a good deal?
- What is the annual price you are willing to pay, even though it is expensive?
- What yearly price do you feel is too high?
- How much is the price so low that you question the quality?
By plotting the data you’ve collected and drawing a graph, you can use the data to find the ideal price range between “too cheap” and “too expensive.”
3. Experiment
Repeat the process of customer research and experimentation over time. However, I recommend doing it differently. Start with light conversational research (like the Envoy example above).
If your target audience is a large company, keep increasing your asking price until prospective customers begin to reject it. If none of your potential customers are negotiating a price, you’re definitely missing out on a revenue opportunity (take Envoy as a lesson).
If you’re a self-service company with fixed pricing, consider data-driven A/B testing. If your customer base is global, test price changes in only one region. This way, you can keep your tests as simple as possible and gain insight.
If you are a company that handles products, you should be doing it on a daily basis to add value to customers after developing products according to the roadmap. Just as there is no end to product development and improvement, there is no end to pricing. Your pricing team should review your monetization strategy and processes every six months, asking questions like, “Should the packaging be updated?” and “Is the price too low?” The answer is usually “yes.”
*This article first appeared on April 19, 2021.
[original text]
(Translated by Tokihisa Sumimoto, edited by Ayuko Tokiwa)
Source: BusinessInsider
Emma Warren is a well-known author and market analyst who writes for 24 news breaker. She is an expert in her field and her articles provide readers with insightful and informative analysis on the latest market trends and developments. With a keen understanding of the economy and a talent for explaining complex issues in an easy-to-understand manner, Emma’s writing is a must-read for anyone interested in staying up-to-date on the latest market news.