Three Common Mistakes in B2B Startup Pricing
Price and revenue optimization is one of the fundamental issues handled by the sales and marketing team. But why is it so important and what makes it so difficult? In this blog post, we will be covering these questions in addition to three common mistake instances in B2B startup pricing.
To begin with, first of all, what is B2B startup pricing? B2B startup pricing is the process of setting prices on services with the intent of marketing and selling them to other businesses, and not directly to consumers. Pricing is important for every company but especially B2B SaaS startups because an excellent pricing strategy can pave the way to massive success, while a poor strategy will leave you far behind your competitors and even mean your business doesn’t survive. For a startup environment in which competition a survival is tough, it is important to have a rigid pricing strategy.
Moreover, pricing is difficult because of its vagueness. There is no optimum pricing strategy- at least not in the sense that most startups tend to think. There is no perfect price, but rather a continuum of price and feature combinations, into which most customers fall somewhere. Also, since there are no previous or a small number of sales are present, there is no data, consumer behavior or limited knowledge of company-customer relationship. Due to all of these reasons, startup pricing is very difficult and entrepreneurs tend to make the following mistakes which hurt their companies. Three of the common mistakes of pricing are as follows:
Too low pricing
It is very important to come up with a good, balanced and rich price for the products. Startups generally lack confidence even if they know that their product is smashing. And the issue is even more drastic when it comes to SaaS startups. While it’s certainly possible to scare off potential customers by charging too much, consulting firm McKinsey & Co. estimates the vast majority of all “poorly chosen prices” for new products are too low, which means businesses are missing profits. This is a behavior with pattern in most of the newly found startups: they do not set the prices high but they set them low. This is because they try to interpret where on the pricing spectrum they’ve landed. However, this is a mistake because it undermines the value of your product and it is easier to lower a price compared to raising it in the future.
Not understanding your value
Most of the the time startups fail to understand the values they are offering properly. This does not only mean to cost less but to not understand how the customer thinks about the problem the startups are solving for them and how they are valuing it. This happens because either they do not understand you or you are not capable of convincing them about the value of the product that you are offering. Moreover, when a company’s executive team — or startup founders — are highly technical, they tend to focus on the “hard stuff” that they had to do, or that the application / service does and forget about the real value the customer would find in the product. This results in under valuing. So what needs to be done is that you need to get out of your own head and focus on “What’s in it for them?” — or what your customers get out of the service.
Not involving the customers
There is something as important as using computer algorithms, data, a ton of research and benchmark to figure out pricing. That something is talking to customers. All of the answers are in customers’ heads. They are the primary sources which can provide information about the optimal price. Therefore, it is important to have conversations with them in order to understand. Moreover, the persona analysis plays an important role in this. It is preferable to develop new personas for pricing purposes that take into consideration feature preferences and willingness to pay. This product-specific information will allow you to develop multiple, feature differentiated pricing tiers that appeal to the different types of customers interested in your product. In this way, you can have a better understanding of the customers’ preferences and the optimal price points.
