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Substribe's 10 top tips for pricing validation
Given pricing is a very tricky topic for early stage founders, we had two sessions on pricing strategy during Seed Sprint Ireland.
For our second session, we were joined by Andy Burden and Steve Budd, co-founders at Substribe, a startup themselves who work with B2B businesses to unlock innovation through recurring revenues. Although they work with B2B businesses, the tips they have apply to all business models. These are our 10 favourite tips we think all startups will benefit from.
Validate first to avoid getting it wrong and offering discounts. Pricing is a difficult one to crack, and although your prices will fluctuate, it’s worth validating as much as you can up front. Incorrect pricing often leads to startups offering discounts to generate sales, and there is evidence that discounts, especially for recurring revenue businesses, leads to churn - the enemy of subscription businesses.
Go through a Design Thinking process ahead of building. Design Thinking is there to help you truly understand your customers and their needs. Spend time understanding your customers. Ask open ended questions, present your concepts, and ask them about price.
Put customer feedback ahead of competitor movements. It’s common to look at how much competitors are charging and replicating similar models, but your customers will be the people responsible for your success and growth.
Understand what people care about. Talk to customers and take the time to understand what features they value, and what they’re less worried about, it will help with pricing conversations and product prioritisation.
Talk about ‘willingness to pay’ with customers / potential customers. It seems obvious, but 95% of business cases do not include willingness to pay. Put pricing into your product design process. Pricing is the biggest profit driver, so it shouldn’t be an afterthought. Take the time to ask customers about pricing using open ended questions.
Let the customer do most of the talking. It’s easy to excitedly tell a potential customer / user about everything you’re doing, and how much you’re thinking of charging. Generally when you do this, people will tell you what they think you want to hear - validation, but this might not turn into actual sales. To maximise the value from conversations, let them talk about their priorities, what they need, and get them to understand how your product will help them, then talk to them about pricing.
Still not sure? Use a framework. If you aren’t sure where to begin, there are loads of frameworks there but Van Westendor’s Pricing Sensitivity Meter is recommended as a method for gauging consumers’ perception of value. Try these 4 simple questions on your customers, and try having conversations at this point (rather than a survey) so you can dig deeper by asking ‘why’.
At what price would you consider the product to be so expensive that you would not consider buying it?
At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good?
At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it?
At what price would you consider the product to be a bargain — a great buy for the money?
Use the data you have to inform pricing decisions. Look at the intersection of data you have, and start aligning it to your priorities. With the data you have, try mapping out scenarios with what would happen if 100 people were ready to buy today...how would price impact their decision? With the data you should know what % of the market are willing to buy at different price points, versus how much revenue you make at those price points. If your priority is % of market, look at what price point allows that, and if revenue is more important, look at which price point suggests the greatest revenue, irrespective of market share.
How many people do you talk to? Obviously, the more validation the better, but you want to get your product, and these conversations take time. It’s recommended to have at least 5 in-depth conversations with each customer segment initially (i.e. if you have a B2B product and a B2C product, needs and pricing validation might be drastically different, so you need to talk to both groups to inform two different strategies). Once you’ve had initial conversations, try using surveys and sending these to another 20 customers to validate again.
Remember, pricing isn’t static. Once live, don’t assume the process is over. Continue checking in with customers to understand value and price, and continue aligning to your priorities.
Want to find more resources on the topic? Check out the blog’s from Substribe and Profitwell.