START-UP PRODUCT VALUATION
Start-up product pricing is an indispensable step in starting a business. To price products, entrepreneurs ought to spend much time and effort researching markets, analyzing customers profiles and experimenting with sales funnels. Realizing product pricing is a vital skill for entrepreneurs, DNES with expert Bui Thanh Do has composed a lesson of “Start-up product valuation” topic. Through it, the expert will share a part of the pricing theory, thereby assisting them in solving a puzzle about determining products’ valuation for start-ups.
I. Basic concepts of start-up product valuation:
Decision Making Unit:
- The term refers to units that make a decision. For example, family is a decision making unit when purchasing toys for children. In which children are “End-user”, mothers are “Primary Economic Buyer" (those who decide and pay), and grandparents are “Veto Power" (those who do not buy but have authority to prohibit). Furthermore, there are other characters such as “Champion" (those who encourage purchases) and “Influencers" (teachers, for example)
- One of pivotal exercises in product pricing is to identify customer segments and explicitly analyze decision making units. Those ones are particularly crucial in B2B sectors. For example, when you sell ERP software, the procurement department is end-users, the accounting department incites purchases, the IT department disapproves and the director pays money.
Process to acquire a paying customer:
- The process of getting customers to pay. In fact, this is a sales funnel for corporates. Purchasing journey of each type of customers is not the same, which affects payment methods and expense amount customers accept. In particular, the purchasing journey of B2B customers will be longer and more complicated than B2C ones.
II. 6 principles in product pricing:
Cost is not a critical factor:
- Let’s price start-up products following values you love bringing to customers rather than production cost. Try to convert the product’ value you bring to the customer into money. For example, your product saves customers 30% of time doing something, how much does that 30% equate to? Set prices based on the benefits you bring to customers; usually the recommended ratio is 20/80. Let customers keep 80% of the benefits, you make a profit from 20%. In industries where there is a dominant monopoly (e.g., Microsoft used to monopolize the operating system), businesses can take a higher share. However, a higher share can make customers hate you, and create an opportunity for other competitors to enter the market and compete on price.
- 3 notices for start-ups:
- 1st note: If customers seem willing to accept risks (for instance: paying before a year), you should offer a lower price.
- 2nd note: If customers mention production cost, let’s shift topics and concentrate on values you bring to customers. Be sincere to tell them that products’ price does not rely upon production cost but benefits they bring.
- 3rd note: Do not reveal production costs to others, particularly sales team.
Understand decision making units and purchasing process:
One of the most important information is the customer's "shopping limit". A practical example mentioned by the expert is the application for funding from companies. There is an implicit truth that if a fund is under 15-30 million, the Marketing manager will not necessarily ask for the director’s opinion. So, if you only apply for grants under 5 million, the process will be much simpler. Besides, NGOs regularly have a surplus of funds which needs to be disbursed quickly around August every year, while the budget for the next year has even been planned since June. Hence, if you are applying for a large amount of funding, the most appropriate time to propose is the third quarter of the previous year. From the above example, founders can ask questions related to the decision-making unit of the start-up product; thereby understanding them and the purchasing process. The questions might be: How much money will a housewife bring to the market every day? How much can an average person pay for a device without having to save up until next month or go through the process of buying it in installments?
Understand the price of alternatives
- It is the core principle in pricing. Unless customers acquire your products, what other options do they get, and how much do they cost? Let’s take a keen interest in choices which offer equal benefits and learn their cost.
- It is also needed to comprehend doing nothing is also an alternative, which means customers continually obtain the same products as they are currently using.
- In this principle, the more accurate data founders have the more beneficial it is to analyze the price of alternatives.
Different users pay different amount
Different customers will pay based on how long they spend in comparison to others in the market. If your products are high-value and proven, the first customers are usually the group which is willing to pay more. For instance: early slots of blockbuster movies, or first ones owning new-brand Iphones. Moreover, these groups tremendously demand the distinction of your products, and tend to buy in small quantities.
Let’s favor trial users and first customers
Early adopters are extremely important, because this is the key group aiding you in innovating start-up products and introducing them to new ones. Let’s discount or provide opportunities to try low-cost products or offer free trials to lower barriers to which the group access.
However, do not “give away” or “curtail price forever”, it delivers a message that your products are not highly valued. Instead, let’s ask these “special” customers to make a pledge not to disclose the price they pay to anyone else. And if products have both hardwares and softwares, let’s diminish the price of hardwares and maintain the price of softwares (because it’s more effortless for customers to estimate the value of hardwares).
Reducing price is easier than increasing price:
Towards the group of first customers, let’s aim at those who are willing to pay more for a technologically superior product. Mass customers only often accept a product with few features, in return for reasonable cost, easy-to-use interface. Once users get accustomed to paying little, it is intricate to persuade them into paying more. In the case of problems regarding the first customers, remember an advice in 5th principle: Let’s ask them to keep a secret to gain a discount.
III. General notices for start-up product pricing:
Do not use cost to determine the price of product
Products’ prices must be based on value customers gain
There are some customers being willing to pay further
Understand customers, understand competitors
Have good discounts for the first group of customers since they are utterly important. However, remember to discount only once and keep the price confidential.
It is necessary to test, certify products’ prices and adjust them according to the development of the start-up. However, you should notice that it is easier to reduce the products’ price than to increase it.
There is the expert’s sharing about product pricing skill above. To learn start-up product pricing more thoroughly, let’s watch a video below:
Author: Bui Thanh Do