Your Pricing Strategy Will Determine if Your Startup Will Succeed or Fail
How y
our pricing strategy will determine whether your startup will either succeed or fail
It’s a dramatic statistic that estimates that 70–90% of startups will fail either by failing to deliver any realistic return to the owner or just closing up shop and going out of business. Through this article, I want to show you that by having the right pricing strategy, those figures of failures can be reversed in the opposite direction as figures for success!
Pricing remains one of the most critical topics for new companies concerning the success or failure of their business. Take this scenario, for instance. A startup has a new product or service for the market. So far, sales are low for the new product or service. There’s not a lot of money to play with, and if the sales volume remains the same, they’ll soon run out of cash. They need to establish a positive cash flow or the business will fail. It’s as brutal as that! They may be able to get a temporary cash injection from the founders and investors, but this can only happen in the short term.
Because of the above scenario, startups can be in a precarious position in the marketplace. Yet it is rare to see startups prioritizing a data-driven pricing strategy. Instead, they use guesswork, gut feelings, and cost plus or even setting their prices to match those of the direct competition for their pricing decisions. Does this pricing strategy work? Not at all. Hundreds of ex-CEOs were interviewed (https://www.cbinsights.com/research/startup-failure-reasons-top) about what they thought were the top reasons for startup companies failing. They were as follows:
There may have been no market need for their product or service, or their competitors were too well-established with a strong presence in the marketplace. The company probably did not understand its market well enough or in detail, and they lacked any comprehensive or true insights into the distinct attributes of their new product or service that has a bearing on their customers’ willingness to pay and willingness to buy. By using their gut feelings or guesswork for their product or service development as well as pricing and marketing, internal perceptions within the company drive everything the company does. The problem with this is that this approach rarely matches what their customers truly value, which is a BIG mistake! Consequently, their prices are either too low or too high, and both will affect the cash flow and sales volume.
One of the reasons for the failure of up to 18% of startup companies is their pricing strategy. With this relatively high figure attached to pricing – why didn’t they change their pricing strategy before it was too late? To be truthful – price is probably not the real issue. It’s the way that some startup companies saturate the market with market messages that totally miss the mark. These marketing messages fail to generate genuine interest in the product or service they are selling and thus, fail to generate a high willingness to buy/pay from their potential customers. A domino effect then happens, when they’ll lower their prices to make (much needed) sales, but invariably this approach is met with lower sales volume and loss of revenue, which the startup can ill afford to lose.
I’ll let you into a little secret. Four of the five top reasons mentioned for startup failures can nearly always be fixed by getting the right price for your products or services.
There’s always a market need if new companies do their research and find the right price for their products and services to match that need. Also, when these companies genuinely understand what attributes and messages drive the highest willingness to pay and what market vertical drives the highest willingness to buy, they can enter the market with a distinct competitive edge over the competition. If you use the wrong method for setting your prices, you run the risk of pricing too low, which in turn has the potential for your customers to mistrust your product or service, and for that reason, they won’t make a purchase. The opposite is setting your prices too high, well above what your customers are willing to pay, which has the same effect – they won’t make a purchase. Both these approaches to pricing can have devastating effects on new startup companies. Introducing a subscription service to sell your products or services when customers simply want to buy once from you will also have the same devastating effect as selling piecemeal when customers want to buy in bundles. If you use any of these examples, then there’s a good chance your potential customers won’t purchase from you. It’s that simple!
Competition is part of the business landscape – new startup companies can always compete with their competitors, especially if they get their pricing right for their products and services. In the same way, new companies that fail because they say there is too much competition can almost always compete if the pricing is done correctly. I don’t mean setting a low price to compete; I mean using those unique attributes of your product or service that the market (and your potential customers) applies a monetary value to and set your prices accordingly. Getting this understanding will enable your company to find the optimum market vertical that fully appreciates your company’s products and services, by circumnavigating your competitors while at the same time tapping into your customers’ willingness to pay a higher price for your product or service over the competition’s.
It’s rather apparent that money and pricing are interrelated. So, with that in mind, if you set your prices correctly, you can pretty much guarantee that your company will make enough money, stay competitive, and never run out of money.
Setting the wrong price by only looking at net values is either directly or indirectly responsible for more than half of all new startup companies failing. That’s staggering! Yet, it is still largely ignored by those companies who need to charge the right price the most.
The best strategy is to measure what a company’s market is willing to pay then this will ensure that its entire go-to-market strategy will lead to success for the startup company. Having this detailed measurement ensures management will focus on the most desirable customers and that its price levels, marketing messages, and pricing strategy will drive the highest desire to buy at the highest prices. If nothing else, all startup executives, board members, and investors must acknowledge that setting the right price is essential for any success in the marketplace. Call it an insurance policy that will turn the future for any startup company from almost certain failure to almost certain success! Pricing right always pays dividends.
Download our Guide to the 7 Easy Steps To Successfully Increase Prices.
