Thoughts on startup pricing strategy: money is the applause

The price of everything and the value of nothing. This Oscar Wilde quote reflects much of today’s business environment, discount retailers have flooded the high-street, online models offer seductive monthly subscription pricing options, and ‘pay-as-you-go’ is an established enabler of contract free affordability.

The very essence of Wilde’s quote is that it’s useless knowing the monetary price of something and yet not fully understanding its true non-monetary value to your customers. This is the challenge faced by all startups.

Yet often startups struggle in developing a pricing strategy and opt for a play which misses opportunity, due to their lack of insight into their drivers of value, and simply focus on ‘that’s the market price we can get away with’. Many default to a pricing model based on an accounting principle known as cost plus – take all your costs (salaries + materials + overhead) and add your profit wish. Pretty simple. Pretty awful.

Many startups make pricing decisions in a seemingly random and detached manner from their go-to-market strategy. This is understandable to some extent, as early-stage entities lack self-belief, branding gravitas and customer intelligence. They have pressure on their runway to execute, however, given pricing is such a strategic play in your business model, making a ‘bet’ isn’t good enough.

It sounds obvious, but pricing drives revenue, it underpins your overall go-to-market approach an ultimately profitability, so you need a good sense of where to start, and be confident in pricing experimentation as part of the learning and iteration process.

Startup pricing is more art than science. You have no anchor to customers, but you have to start somewhere. Getting pricing right requires a confident, experimental mindset and willingness to have an honest and bold dialogue with potential customers. Each conversation is another signal telling you if you’re moving in the right direction, or if you need to pivot. There are a number of bad habits and pitfalls to avoid, for example:

Prices are developed without customers You can’t figure pricing out without engaging customers as benchmarking research. All the answers are in your customers’ heads not in your spreadsheet, so get out of the building. A startup has to prove it can solve a problem and then develop a repeatable, scalable sales process for customer discovery, validation and growth. Pricing is an integral element to this model.

Prices are set in stone, not in motion Founders often fall into a common trap: they pick a price, get early confirmation, and declare ‘this is the price we’re taking to market’. They have a hypothesis to test, but then get nervous and lose this focus, and end up with a series of random prices as they seek to close deals. Your strategy should be to pick a pricing starting point, and stick with it as a permanent solution for a sufficient period of time to provide validated learning.

The price is too low Even the most confident founders price low. Instead of letting the market tell them where they’re not going to win deals, they’d rather price low and end up trying to interpret where on the pricing spectrum they’ve landed. That’s how founders talk themselves into the discounted side of the pendulum. If you’ve already started from a low price you’re already capping your revenue growth.

The pricing structure is complicated Many early pricing pitfalls are rooted in trying to innovate too much on pricing structure. Customers are used to buying in a certain way, such as a monthly fee or per transaction. Anything too far from this, which you may regard as ‘innovative’, can be a barrier for customers to understanding and adoption. Startups must maximise their learning per conversation around pricing.

So take a step back. Pricing is a pathway to the market, so it must serve the strategy through which you hope to get a foothold. Before you begin experimenting with pricing, get clear on the main driver in your early go-to-market strategy:

• Getting your first referenceable customers – who are your ‘famous five’ whose badges represent credible testimony?

• Securing targeted, specific large customers where you can build a footprint to scale long-term revenues

• Maximising revenue across a number of targeted customers in a specific segment

• Gaining widespread market share and brand awareness

Each of these goals has a different pricing optimisation, often exclusively. Statistics show that as few as five customer development conversations provide 80% of the price testing and learning you need. You can apply the takeaways and adapt the next experiment. You need a different set of customer development questions depending on where you are with your pricing experiments.

Here are a few of these questions to consider for customer development conversations for early or neutral prospects:

• What is the last similar solution you bought? Tell me about your evaluation process.

• If I told you that I have a solution to [insert pain point], would you be interested? Why?

• What do you think is an acceptable price for a product that solves this problem?

• What is an expensive price?

• What is your budget for a solution?

These customer development questions are part of getting a more informed understanding of how customers think about your product, and helping you to define two key inputs to help shape your pricing strategy that follows:

Your upper price ceiling This is the highest price the market signals for the value you provide. Force yourself to test this, even if it means getting into the uncomfortable zone of pushing for a higher price, you need to find it. You’ll get pushback and refusal, but if you’ve done a good job showing the value of your product, prospects will be interested. I’ve worked with tech product startups where we’ve gone from £5k to £20k in price testing the ceiling.

At a certain point, price can be a barrier and even if prospects value your product, they may delay or defer purchase. But the key here is that you’ve identified your upper ceiling, and now decide whether pricing at this point is strategic or counter-productive to growth.

Your anchor Your anchor is an alternative that customers compare your product against. What are you replacing? Set the anchor to something the customer understands. Make sure you find an anchor that gives you a price point that’s high enough. Don’t expect your customers to figure this out on their own, it’s up to you to paint the full picture. The goal is to get data that will really give you confidence in your upper ceiling and anchor.

Once your customer development conversations provide insight into these two factors you can shift your focus to the more robust pricing conversations that you will run, but you now have a range. There will be times where the customer is pushy and you need to deliver a price. The best practice is to deliver a range. When you’re testing the market, pricing is inherently a nerve-wracking conversation, but one you must embrace to get confirmation that customers see the value of the product.

The goal is to validate the tangible value your product offers and get customers to move themselves to your price point. If a customer baulks at your price offer, they are saying ‘this solution to my problem does not provide enough value’ – but don’t take that as a signal to reduce your price, rather it’s an opportunity to recognise they are not rooted with sufficient knowledge of your offering, so go again. After this, if prospects still don’t get to that point, you’re wasting your time, as they are buying based on cost, not the value of your product.

In addition, conversations not only allow for adjustment, but also set the tone for follow-up. They may not be able to give a specific price that works now, but don’t panic. You have more than one shot, don’t knee-jerk and panic to get a deal closed today and offer a discount, who knows what’s going to happen. Both parties have invested time at this point, an instead of jumping to a discount, foster empathy.

Don’t be afraid to own up being an early-stage company, along with the constraints that come with that, explain your seeking to understand what is a valid price point for the value you’re providing.

This type of exchange reframes the sales conversation and gathers further intelligence. No matter where you start with pricing, at some point, your structure will change – you may introduce new product features, enter a new segment, or develop a different go-to-market strategy. Maybe your ideal customer profile changes. Each of these scenarios alters the equation, but until that point, develop a minimum viable process to help determine your early pricing.

Free markets tend to undermine themselves, as Marx identified, from the bottom upward – which is why we see a race to ‘cheapest price’. Many business people are besotted by ‘market rates’, but as Economist Paul Krugman says, this is beauty clad in impressive mathematics for a convenient truth. Equally, opportunist pricing can make short-term gains, but don’t get too rosy eyed, markets can be easily bewitched, and scoundrels seeking easy exploitation ultimately fail.

Be confident and curious in creating and capturing value for customers. Be obsessed with value, your clients will appreciate it. Many startups take a ‘case by case’ opportunity basis to pricing, and convince themselves ‘this is a big new client, it’s a valuable opportunity, we’ll reduce our price to win the job’. This is flawed, negotiate and fix the commercial expectation. Respect yourself and your business. Do you want to haggle over price, or do you want to showcase the ideas that will give you innovation, growth and success, as the basis for your pricing?

So, the key considerations are:

Establish the right pricing culture in your startup Be a value pricing firm that prices according to the external value created for customers

Establish a pricing strategy and make it a core competency There’s a big difference between listening and waiting to talk. Establish the floor and ceiling price by being confident and clear about the value you create.

Price on purpose What are you really selling, what are your customers really buying? A florist isn’t selling flowers, it’s selling love; Dulux don’t sell paint, they sell the colours of life; Harley Davison don’t sell motorbikes, they sell adventurous lifestyles; software companies don’t sell technology, they sell innovation.

The most critical input at an early stage startup remains the voice of the customer, not your product. Don’t fall into the four bad habits identified earlier, and stumble into a pricing conversation. Resist customers jumping the gun to talk about pricing before you’ve unpacked and explored the value fit of your offering to their problem – never panic or prematurely discount if there’s pushback, but continue to fact-find around constraints.

Don’t get seduced by the numbers in articulating your value proposition – money is the applause, not the reason you’re here.

Forget about the price tag, it’s not about the money

Anyone who lives in Burnley, a humble, honest industrial northern town, feels a warm glow of familiar nostalgia whenever they see the towering stands and floodlights of the football ground amidst the rows of terraced housing. Turf Moor has been the home of Burnley FC since 1883, a landmark in the town. Everyone connects with the club, it’s a reference point for giving visitors directions, and the heartbeat of the town on match days. Walking by the ground yesterday, as always it stirred memories of games gone by.

There were wandering friendly dogs, a teenage couple snogging ferociously on the steps of the pub, old men in overcoats and flat caps, and the local chippy opening up for dinner time customers. But it was the giant hording outside the ground that caught my attention: ‘Next game: Burnley v Wolverhampton Wanderers’, broadcasting a call-to-arms.

Although classified as a fan, I am a ‘customer’ of football in a business sense, but it’s not that straightforward. It’s more than 90 minutes. Football has a unique relevance in a fan’s life, building heroes in our minds when we are young, and that never leaves us – more so in a week when John Connelly died, playing 265 games, scoring 105 goals for Burnley in the 1960s. We have detailed, indexed memories of previous seasons results and games, and live in hope about a great winning run just around the corner. Football is an ever-present beacon of unfounded optimism in our lives.

If you’re a fan of a football team you go to their matches and your support is unconditional – it isn’t based on the likelihood of victory, your position in the table or how much you have to pay – however, the average cost of the cheapest adult ticket in the top four divisions of English football has risen by 11.7% – more than five times the rate of inflation. The BBC Sport Price of Football survey recently found that the average price of the most affordable ticket has gone from £19.01 to £21.24 in the past year. The figures showed the most expensive adult match day ticket was Arsenal at £126, and Arsenal also have the most expensive season ticket at £1,955. Meanwhile, the most expensive tea in British football is in Manchester, where both City and United charge £2.50.

While Premier League grounds are over 95% full, teams are struggling to sell tickets where previously this wasn’t an issue. The recent Tottenham v Chelsea match, one of the biggest games of the season, saw tickets on general sale. With money tight and high-profile matches on Sky, the inclination not to attend and watch games on TV instead may increase. With the latest Sky deal seeing a 70% increase in revenue for Premier League teams, the number of Sky subscriptions is probably of more importance to clubs than selling out home games. Arsenal earned £56m last season from broadcasting revenue – do they really need to risk alienating their ‘customers’ and charge £126 for a ticket?

There is a belief that football fans are very loyal to their clubs, rain or sunshine they will be there for it, but research shows the assumption of deep loyalty to the game is far from the truth. Dr Alan Tapp, at the University of West England, undertook research about fan loyalty. The results shattered the assumption of fan’s undying loyalty. He found the game has ‘fanatics’, ‘repertoire football lovers’ (just love the game) and ‘carefree casuals’. The fanatics will attend every game and know everything about their team. The repertoire fans go to enjoy football if they can (they see the game as an entertainment option) and the casual carefree will support from afar, just waiting for results.

This research tells us that football customers cannot be categorised in the traditional business sense, because their loyalty does not purely depend on success of their team, or the quality of games, but in the same breath it can not be taken for granted if their team struggles. The fans do not stop supporting the team, they simply withdraw their custom and become armchair fans, from the TV or Internet. But football is not similar to other businesses as this custom is not transferable to another team.

So, who are the customers – match day fans or Sky subscribers? The Sky TV money feeds the mouths of the elite, yet there are as many supporters of clubs in the English professional game outside of the Premier League, as there are in the Premier League. Yet the conclusion is this: Premier League teams don’t need the revenue from fans, such is the quantum of the Sky money. The customers that built the clubs are no longer important, yet are vital to creating a match day atmosphere, the essence of the 90 minutes and as for Burnley, the heart and soul of the town.

The threat that a generation of fans may miss out on the experience of attending live football due to price appears to be a real one. This is an example of a common mistake in understanding pricing. A business does not lower the costs of one product because another is selling for more. It will always charge whatever it takes to maximise revenue from that product/market segment. However, if charging more and attracting fewer fans brings in more revenue than a full stadium at a lower price, that’s what they’ll do.

This approach is short sighted. Clubs may continue to do well from current supporters but their numbers will decline, and it needs to create new customers to ensure long-term stability. Despite the eye-watering Sky TV-deal monies, only 10 clubs in British football remain profitable as player wages have spiraled. I think the pricing in place will prevent the next generation from enjoying live football. As it is, it will become a sport in which relatively well-off people will be able to go and watch it live and nobody else. That seems to me to be a tragic historic reverse of ‘the working man’s game’.

For many fans, the football brand is a passion. Due to their cultural ties and emotional appeal, football clubs generate significant brand loyalty, seen on the streets via replica shirts and scarves, a display of allegiance to their club. It is evident that football without fans wouldn’t be the sport that it is today. Fans, as customers, are the historical base of a club’s economic model and should not be taken for granted, they fill up stadiums, buy merchandise, and attract sponsorships. The club’s highest value customers are those who build their lifestyle around the club’s identity and attend matches. Long-term oriented relationships are crucial in the football industry.

Sky’s injection of cash is only funding the elite, what happens to the rest? What are the industry’s pricing options? Marco Bertini from the London Business School and John Gourville from Harvard Business School identified five pricing principles that the committee organising the London 2012 Olympic Games adopted, facing an extraordinary business challenge: How to price 8 million tickets in a way that gives equitable access to 26 sporting events, meets revenue and attendance targets, and adheres to the explicit social objective of making the Olympiad Everybody’s Games?

To accomplish this, the committee took what Bertini & Gourville call a ‘shared-value’ approach to pricing, looking beyond the mechanics of ‘running the numbers’ and recognising the way to generate revenue can open up opportunities to create additional value. That means viewing customers as partners in pricing options, based on value creation, a collaboration that increases customers’ engagement and taps their insights about the value they seek and how firms could deliver it. The result is benefits for firms and customers alike. This is clearly a pricing model for the football industry. By studying the 2012 Games and the pricing process, they determined five pricing principles that every business could profitably adopt:

Focus on relationships, not on transactions
Ticketing and pricing is the most visible aspect of your relationship with your audience. The solution was to value customers more than their money. First, they increased the number of pricing tiers, which kept some ticket prices low while still hitting revenue targets. Second, it offered a pay-your-age pricing plan for young customers and discounted tickets to those over 60. Third, for the opening ceremony it chose high and low price points – £20.12 and £2,012, whose symbolic rationale everyone understood.

Be proactive There was no bundling of tickets to a more popular sport with those to a less popular sport, a tactic sometimes used in previous Olympics to increase ticket sales and boost attendance at the less popular events. Ticketing of every sport stood on its own, creating 26 different pricing plans detailing how tickets should be sold to the appropriate market demand. The committee did bundle public transport into the ticket price, recognising the opportunity to reduce traffic congestion and add customer value.

Put a premium on flexibility The committee had to price all events more than a year and a half in advance of the Games, before it had a clear understanding of demand. Besides increasing the number of price tiers across events, it also promised more expensive tickets would have a better view of the event. In the spring of 2011, fans placed requests for tickets through an online ballot, revealing how much they were willing to pay for various events. This allowed the committee to gauge demand at each price point and reallocate some seats accordingly. By not predetermining the number of seats in each tier, the committee had the flexibility to better satisfy actual rather than anticipated demand, which resulted in more seats sold and happier customers.

Promote transparency One of the explicit goals in pricing the Games was to limit negative media attention. From early on, a continuous flow of information about the rationale and process of ticketing, key dates in the ticketing time line, price tiers and the number of tickets available, were communicated. At times the systems didn’t work and there was some bad publicity, but at least the openness prevailed.

Manage the market’s standards for fairness From the moment the ticketing process began, the committee communicated the pay-your-age and senior discounts and the percentage of tickets that would be sold at £20, at or below £30, and so on. The committee rejected any suggestion to auction the tickets in highest demand, instead, ticket allocation was enabled via a simple lottery, reinforcing that there was no preferential treatment.

Shared-value pricing is a new and evolving strategy, but given the fundamental shifts in consumers’ power and expectations, customers will have dwindling patience for traditional pricing. Considering the benefits to be gained by increasing the pool of value in the marketplace and sharing it with customers, any firm that is not evaluating its pricing through a shared-value lens should ask whether it can afford not to. Furore over the price of Rolling Stones tickets, the latest round of Energy price rises, the growth in price-comparison web sites shows how pricing has a high profile, and how the social networks quickly chatter.

What I can tell you is the feeling I get at Turf Moor as a customer is indescribable. I get this feeling in my stomach which I never want to go away. I get this sudden rush which makes me feel like I can take on the world and win! And hearing ‘Come on Burnley!’ roared by 15000 people brings a lump to my throat every time. You can feel the emotion of everybody in the ground, you know they mean every word. No amount of Sky money contributes to this part of my customer experience.

At it’s core football is a social activity. Football originally resonated with people because it tugged at our local tribal instincts – Us versus Them. Nowadays that has been lessened but football has the same power to exhilarate. You can’t put a price on that.