Pricing Strategy for Start-ups – Value Based Pricing

Apart from dealing with the unknown factor and building credibility, pricing is one other hurdle that most start-ups find hard to overcome. How much to charge? Am I overcharging or am I leaving money on the table? Questions that plague every entrepreneur.

When it comes to pricing, a simple cost-plus strategy may not work because it’s dependent entirely on your ability to produce cost-effectively. Then how do you fix your margins? Will the final price meet customer approval? At the end of the day the customer will only pay the price which he believes is value to him.

This whole process can be made easy if you have correctly identified what your product does for the customer, ie. What value does it bring to him? Build some metrics around this value and convert the same into actual monetary benefits that the customer will derive from it. You will then be able to convince both, the buyer and the user, who in most cases are not the same person. More often than not, the user, who derives the functional benefits, ends-up not convincing management only because he is not able to convert the benefits into ROI for the company. What will the company get for the investment? This is what the CEO or CFO would be interested in. This conversion of benefits to financial numbers will help to push your product from a ‘Good to have’ to a ‘Need to have’.

Let me try and enumerate this with a Use Case.

Company ABC has built a Process Automation solution to enable the customer to bring in business process efficiency. Business processes could include internal processes like on-boarding an employee, financial approvals, HR approvals etc. or external processes like sales process, dealer management, vendor management etc. Through process automation the solution promises to bring about repeatability, scalability, on time and within budget performance.

There is Prospect X who is in the business of setting-up retail outlets for retail chains, which is a repetitive process requiring a high level of planning to ensure that all stakeholders deliver on time. They follow a set process which involves interaction between various groups including real estate agents, interior designers, interior execution company and warehouse for finished goods to reach the store before opening.

The big pain point here is that the outlets are never opened on time. This obviously results in incurring dead rent (rent paid beyond the target opening date, which is not budgeted) and loss of revenue for the period of delay.

The process automation solution of Company ABC promises on-time performance by ensuring that each stakeholder completes his/her task on time through a process of pre-emptive alerts, reminders and escalations. Any task that needs to be completed in a particular timeframe is captured in the process map as well as the name of the person responsible to complete the task.  The moment the details are entered a task mail is sent by the system to the concerned person and this mail will remain in the ‘Inbox’ until the task has been completed, ensuring the person does not forget. Based on pre-set criteria, the system will also send alerts and reminders to the person’s mobile to make sure the person does not forget the task. In case the person still misses the deadline, an automatic escalation mail will be sent to his superior. Alerts and reminders are meant to ensure the person does not forget and escalations are expected to instil the fear that the boss will know of any slip-ups and be made accountable. Over time people are expected to fall in line and tasks completed on time at very stage in the process.

The team at Company ABC went about first understanding the typical process that Prospect X followed for each store opening, the delays at each stage of the process, typical reasons and bottlenecks. They also got a feel for the expense incurred for each store opening towards dead rent and the average revenue loss due to the delays.

This way they could safely presume a 10% reduction in delay per store using their solution and knowing the store roll-out plan of the customer for the year, they were able to quickly compute the savings that the customer can expect in Year 1.

Company ABC then fixed a price derived from the savings and were able to convince Prospect X to invest by projecting the ROI. The price gave value to the customer as well as good margins to the vendor.

So it is important to understand the value that your product brings to the customer and convert it to tangible and measurable benefits, based on which you could then arrive at a price that the customer would bite. You would have then created the ‘NEED’ for your product.

The author, Srikanth Vasuraj, is a Business Consultant focused on helping start-ups to grow. He can be reached at +91-98454 78585 or srikanth@nodiva.co.in . Please visit www.nodiva.co.in for more information.