The saying goes – You can always lower your price – but it’s difficult to raise it. So start testing before you become fixated on a price.
When you’re doing a startup it’s tempting to start your pricing low. In fact, many founders will become fixated on a price or a specific percentage of margin before testing their assumptions. Avoid that temptation. I talked before about startup pricing metrics, categories and comparisons. This is an important part of building your financial model, but it’s not the only part.
Your sales price has to be large enough to cover three additional expenses:
- Cost of customer acquisition – what does it cost to acquire a PAID customer to your site? As an example:
- How much does it cost to get 1,000 uniques to your site in a month
- What percentage of that traffic will register and give you email, name and phone number
- What percentage of those registered will give you a credit card and purchase your product
- How much churn will you have
- Margin – is the difference between that revenue and the cost of acquiring your customer
- You obviously can’t price gouge – unless you’re the only product with no competition – which isn’t going to be your problem
- You will need as much margin as you can eek out of the sale, because you’re going to be wrong with your other assumptions
- Cost of Building your product –
- How many hours for developers
- How much time for sales people
- How much general and administrative costs
The problem with starting your price too low is that it establishes a value that is in direct correlation to your belief in the product. Let the market give you the value through testing, not from a lack of belief. Besides, you’ll need all of the margin you can find to answer these other questions.