Accept that the Price Won’t Be Right, At Least Not Right Away

For one of us (Beth), pricing is the bane of her existence. Ironically, the other one of us (Victoria) could give both Bob Barker and Drew Carey a run for their money. Love it or hate it, the one thing most business veterans agree upon is that you aren’t going to get pricing right, right off the bat. At this point in your process, flexibility, ingenuity and patience are going to be in high demand.

But let’s catch up those in the cheap seats before we dive deeper into this Female Maverick Must Do.

While we can’t stop ourselves from continually being freaked out by Seth Godin’s ever-changing roster of horn-rimmed glasses, we do love his quote, “Don’t find customers for your products, find products for your customers.” We apply the same rule to pricing: First figure out what features are the most important to your customer. Then work out the way to deliver what they want for the price they can pay. Remember, while there is a lot of science in pricing, in the early days, there is also quite a bit of art when you are trying to bring your new product or better mousetrap to the market. Don’t sweat it too much at this point – your pricing strategy will evolve when, and as it needs to, over time.

Be willing to spin the wheel.

There are a lot of different pricing strategies out there, and in the beginning, it will feel a little like roulette with the many bets you can make. Maybe you’ll start with introductory pricing to help compel customers to try the product, opening the door to that critical early feedback. Or, it might make sense to launch with a high price tag and then lower the price when you need higher levels of penetration. Others opt to bundle a new offering with other products (even via partnership) so the customer doesn’t even know the price at first.

Of course, it is challenging to create a financial model without some clue of what you are going to charge. It’s equally tough to figure out what the average profit per product or service will be when pricing has yet to be hammered out. But the reality is, that price point is almost sure to change over time.

Tesla, for example, initially set higher prices for its electric vehicles to attract early adopters willing to pay a premium. As the market matured, they introduced more affordable models and reduced the prices of their higher-end options to appeal to a broader audience. Similarly, Amazon Kindle started with high prices and later lowered them to enhance market penetration.

Coca-Cola and Chipotle did the exact opposite. Coca-Cola introduced smaller pack sizes at slightly lower prices, aiming to make the per-ounce cost increase less noticeable to consumers. Meanwhile, Chipotle focused on making its new premium products stick by adjusting loyalty rewards and offering limited-time promotions to encourage customers to try them.

We initially priced our services poorly, adopting our own hybrid strategy. We priced low, reasoning that companies weren’t yet sure they needed to make an investment in sustainability disclosures and might be skittish to spend money. This not-so-brilliant approach resulted in a -50% profit margin on our early clients. And, not only did we not make money, but we also turned off potential customers. Our primary buyers, the general counsels, were not price-sensitive at all. Many of them came from large law firms where top specialists commanded premium hourly rates. Our low pricing strategy actually deterred some potential clients who worried that our specialists might not be so “special” because they were cheap. Needless to say, we quickly pivoted our pricing approach.

Aim for the right ballpark.

Generally, the best bet is to stick to the following tried-and-true guidelines. These will help ensure your initial pricing is at least in the right zip code, even if it’s not the exact price point or strategy where you will ultimately play.

1. Review pricing of similar products or services. For us, this was a struggle at first because we didn’t have a direct competitor. As a proxy, we examined the prices of other consulting services aimed at our target buyers. It wasn’t ideal, but it gave us a starting point.

2. Analyze your costs. In our case, salaries and benefits were the major factors, though we also considered the technology and data our team used. Initially, we decided to exclude R&D costs from the service price, hoping to recoup them once our product gained traction. (Remember to check your state’s tax guidelines, as some states, like Illinois, allow deductions for certain R&D expenses.)

3. Consider market conditions. If inflation is high and budgets are tight, you might need to lower your initial pricing. Similarly, if you’re trying to outpace a competitor, a lower price could help. Because we were launching at a time of low inflation and booming budgets, our low pricing strategy made little sense, and thus the quick pivot.

Keep moving toward your ideal customer.

Ultimately, you'll experiment with several pricing strategies as you work to identify your ideal customer – the one with the lowest cost to serve and the willingness to pay the highest price. Until you get there, adopt a survivalist mindset: Make your primary goal to avoid running out of money before you find that ideal customer.

As an aside, six years into having a high-growth, profitable product, our new PE-backed owners decided to spend $100k on a pricing strategy consult. They believed we were leaving money on the table. Turns out they were right. And everyone has a different opinion on pricing.

 What’s Next?

You’re checking boxes at a fast and furious pace as you get ready to launch. But make sure you’re taking time to take in the feedback and (gulp) criticism you’re racking up along the way. Guessing that if you are like most entrepreneurs, hearing what you’re doing wrong or could do better is not your favorite pastime. But the reality is, unfiltered critique is probably the most valuable asset you can have in the early days. Of course, you’ll have to find the delicate balance between taking feedback too seriously or minimizing it too much. We’ll get into the fine points on this next week.