What’s the best way to experiment with pricing for an early stage B2C?
How much should you be swayed by the competition?
How do you get investors on board when you aren’t a Saas startup?
All this, and more was covered in our Wednesday Wee2Work talk with Ben Drury, Co-Founder and CEO of Yoto, a two year old B2C and B2B2C KidTech hardware, software and subscription startup that recently closed Series A funding. Below are Ben’s top tips for pricing…
Don’t fall foul of confirmation bias. Firstly, when it comes to product pricing, you might have an idea of how much someone will pay for your product and when you ask co-founders and friends they might agree, but don’t fall foul of confirmation bias. It’s important to get pricing right, so ask around (and follow tip #2!).
Now’s the time to experiment with pricing. Whether you have a physical or tech product, try out different price points and get a feel for which is the most popular with your target customers. You can do this through adding ‘early bird’ pricing, offering discounts, bundles, bolt-ons, subscriptions, and more. Testing multiple price points simultaneously can help you figure out a strategy that works quickly.
Don’t focus too much on ‘cost-up’ pricing. In the early stages, you’ve got to ensure you have product-market-fit, and for this you need to know how much customers will pay for your product. Cost up pricing is where you total up your cost of production + margin, however, if you put this price out there, you might not get traction. Find the price consumers will pay (even if it’s at a loss for now), get initial engagement, and either raise investment, or finesse your supply chain so you can make the price point work at scale. If you can’t make it work, you’ll have to rethink the business model.
Look to competitors / comparables. You might be different / better than your competitors, but consumers will look to comparables as part of their decision making process. You don’t need to match pound for pound, but you’ll want to be in a similar ballpark to be considered, or have a strong narrative around why you are different.
Use psychological pricing. Everything you do with pricing is aimed at simplifying the decision making process for a consumer. Psychological pricing influences consumers who will perceive your product as a better value (seriously - it works!). Classic charm pricing is selling for £9.99 instead of £10, but psychological pricing also includes offering 50% off, buy-one-get-one-free, and flash sales to instil a sense of urgency. Great for experimentation!
Make the most out of each customer. Investors are interested in stats like CAC (cost of acquisition per customer), and LTV (lifetime value of a customer). As a B2C startup you need to acquire a critical mass of customers for investors to see a return, and you want to extract the maximum amount of value from each one. Think about how you can use bundles, add-ons, or subscriptions at point of sale to increase the value of each customer.
Think about margins. For startups with physical products and hardware components, margins can be low meaning you need to focus on volume to make the returns you need. New products or services that pair really nicely with your main product can mean that for every low margin product you sell, you also sell the add-on with a 50% (60, 70, etc.) margin too. Get creative!
Make sure you’re ready for scale. If you’re pricing low to get volume sales, especially if you’re pricing at a loss to get initial engagement, ensure you can meet demand and you’re ready to scale. Selling too much too soon can kill a business if the infrastructure isn’t there to deliver.
Raising investment? Know your cohorts! Cohort analysis for retention helps you understand how many customers continue to be active users in the days/weeks/months that follow. Investors want to see loyal customers who make repeat purchases, or are using your product regularly. Know how many of your consumers are recently acquired, versus engaged and loyal, versus one time purchasers, and have the narrative as to why they fit in these cohorts.
Want to get more training on pricing and marketing? Ben recommended the mini MBA course with Professor Mark Ritson, check it out here.