Practical Guide to Pricing for Startups: 7 Strategies

Discover 7 pricing strategies for startups, especially B2B companies, covering initial price setting, evaluating customer expenditure and ROI, and clear value proposition.

How do you determine the price when you come up with a brilliant idea? Many companies often set prices based on intuition in the early stages. However, this does not guarantee the long-term success of the company. Proper pricing is a critical factor that determines the survival of the company. This is especially true for B2B companies.

To ensure the survival of your business, how should you set your prices? In this article, we will explore 7 methods for pricing in B2B companies and explain how each method can be applied. Learn the right pricing strategies to create stable revenue through better pricing strategies for your business.

1. Early Stage

In the early stages, price does not matter. As startups grow, prices will change frequently. If a customer is willing to pay even a small amount, it is much better than nothing. Getting people to pay anything is significant, and the amount itself is not important. In the early stages, it is crucial to validate demand through pricing.

Importance of Initial Pricing

Initial pricing is the first step in validating the economic model of the company. The fact that customers are willing to actually pay money is a strong signal that they find your solution valuable. This is not just market research but seeing the actual market response.

Validating Demand Through Pricing

The goal in the early stages is to get customers to pay anything. This can validate the demand for your product or service. Adjust your pricing strategy based on early customer feedback and confirm the market fit of your product.

Dropbox’s Early Strategy

Dropbox provided a simple free trial version to see if users were willing to pay for the service in the early stages. Through this trial, they gauged user reactions and set appropriate prices when transitioning to the paid version.

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2. Do Not Ask Directly

Questions like “How much will you pay for this solution?” are not good. Instead, ask questions like “How much are you currently spending to solve this problem?” or “How do you evaluate the ROI of this solution?”. These questions focus on value creation rather than specific prices.

Value-Based Approach

When determining prices, it is important not to ask customers directly about their willingness to pay. Customers may find it difficult to provide clear answers to direct questions. Instead, ask how much they are currently spending to solve the problem or how they evaluate the value of the solution. This helps to understand the actual value that the product or service provides.

Understanding Current Expenditure

Ask how much customers are currently spending to solve the problem. This question helps to understand the costs currently being used in the market. For example, if a customer is spending 1 million won per month to solve a specific problem, you can set your price based on this.

Evaluating ROI

Encourage customers to evaluate the return on investment (ROI) they can get from your product or service. This is a crucial factor in determining the price customers are willing to pay. For example, if a customer expects to save 100 million won annually using your product, you can set a price corresponding to that value.

Salesforce’s Approach

Instead of asking customers “How much will you pay for this solution?”, Salesforce asks “What value can you create with this solution?”. This helps to set prices based on the actual value customers derive, enhancing customer satisfaction.

Importance of Specific Questions

Specific questions help to accurately understand customer needs and problems] [“What solution are you currently using to solve this problem?” is useful in clearly understanding the customer’s current situation.

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3. Value Proposition

Without conveying a clear value proposition, pricing is difficult. It is important to understand how customers perceive the value of the product, rather than considering their costs. Customers must strongly feel the pain of the problem, need the solution, and believe that our company can solve it.

Importance of Clear Value Proposition

Value Proposition is clearly expressing the benefits customers gain from our product or service. It provides the reason why customers should choose our product. Conveying a clear value proposition is the basis for pricing. When the value proposition is clear, customers are ready to pay the corresponding price.

Understanding Customer Perception

It is important to understand how customers perceive the value of the product. This is not just about setting a price but understanding what value customers assign to the solution our product provides. If customers are considering other alternatives to solve the problem, it is crucial to convey that our solution is superior.

Developing Value Proposition

When developing a value proposition, consider the following elements:

  • Customer Problems: Define the main problems customers are experiencing.
  • Solution: Explain how our product or service can solve these problems.
  • Benefits: Highlight the main benefits customers can gain from this solution.
Example: Apple’s Value Proposition

Apple always conveys a clear value proposition by providing innovative and high-quality products that customers need. Customers highly value the superior design, ease of use, and excellent performance provided by Apple products, allowing Apple to set high prices.

Emphasizing Customer Problems

Emphasize that customers strongly feel the problem. The more customers recognize the severity of the problem, the more they will need our solution. For example, if a corporate customer has suffered significant losses due to data security issues, emphasize that our security solution can perfectly solve this problem.

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4. Comparison and Analysis

People evaluate and decide prices through several factors. This section explains how customers evaluate and decide on prices.

Comparison with Competitors

Most startups try to price slightly lower than competitors. This is an important strategy in the early stages of market entry. Pricing lower than competitors can significantly help attract initial customers. However, instead of just lowering prices, find ways to provide better value than competitors.

Comparison with Similar Software

Customers can compare prices by analyzing other software. If similar software is already on the market, analyze their prices and features, and emphasize how our product is better. This can show customers that we provide greater value.

ROI Equation

Customers can calculate prices through expected time savings, revenue generation, etc. It is important to clearly explain the economic benefits the product or service can bring to customers. For example, if a customer expects to save 5 million won annually by using our software, you can set a price corresponding to that value.

Price Scalability

Examine how prices scale from small pilot operations to large-scale operations. Initially, attract customers with a low price and then adjust the price as the usage scope expands. This strategy encourages customers to start at a low cost and gradually enjoy more benefits.

Example: Slack’s Pricing Strategy

Slack attracted users in the early stages by offering a free version. After users experienced the usefulness of Slack, they were transitioned to the paid version with more features. This strategy naturally led users to upgrade to the paid version.

Dialogue with Customers

It is important to learn how customers analyze and decide prices through conversations. Use customer interviews or surveys for this. Understanding how customers perceive the value of our product and make purchasing decisions can help develop more effective pricing strategies.

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5. How Companies Budget and Purchase

To develop a successful pricing strategy in the B2B market, it is crucial to understand how customer companies budget and make purchasing decisions. This section discusses understanding the purchasing process of customer companies and optimizing pricing strategies accordingly.

Customer Company’s Budgeting Process

Companies consider various factors when budgeting. The most important aspect of the budgeting process is how the budget allocated to each department is used. For example, many companies have the IT department manage the budget for software and technology solutions. Understanding these departmental budgets allows us to set prices that fit the budget of each department.

Understanding Long Sales Cycles

Sales cycles can be long in the B2B market. Long sales cycles are due to internal approval procedures or

the involvement of multiple stakeholders in the customer company. In such cases, setting prices too low can result in long-term losses. When the sales cycle is long, it is important to set high prices to confirm that customers are genuinely willing to pay.

Example: Standout Jobs

Standout Jobs, a recruitment software company, helped companies build better recruitment sites and charged a monthly subscription fee. However, many employers did not use the product and did not pay the subscription fee because the HR department was not accustomed to paying monthly fees for software. This was a result of not understanding the customer’s budgeting process.

Targeting Enterprise Market

Do not miss the opportunity to target large-scale customers in the enterprise market. Enterprise customers generally have higher budgets and complex requirements. When targeting these customers, clearly explain how our solution meets their complex needs and set appropriate prices accordingly.

Key Considerations

  • Long Sales Cycles: In cases of long sales cycles, set high prices to secure initial revenue.
  • Sales Personnel: If sales personnel are needed, reflect their costs in the price.
  • Multiple Stakeholders: When multiple stakeholders are involved, do not set prices too low.
  • Enterprise Market: When there is demand in the enterprise market, target it to generate higher revenue.

Understanding Customer Budgets

To understand customer budgeting processes and purchasing decisions, use direct conversations or surveys with customers. This can help identify the actual budget situation and purchasing decision factors of customers.

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6. Free Trial, Paid Trial, and Freemium

Most B2B SaaS companies offer free trial versions or freemium options. This section explains the pricing strategy using free trial and freemium models.

Advantages of Free Trial

A free trial is an excellent way to allow customers to actually use the product and directly experience its value. This allows customers to fully understand the features and benefits of the product before making a purchase decision. Free trials are effective in attracting early customers and validating the product’s value.

Converting Free Trial to Paid Customers

Converting customers to paid customers after a free trial is an important step. During the free trial period, ensure customers fully recognize the value of the product. Use strategies such as:

  • Limited Features: Provide only basic features during the free trial, clearly distinguishing premium features available only in the paid version.
  • Set Trial Period: Clearly set the free trial period, allowing customers to fully experience the product’s value within that period.
  • Continuous Support: Strengthen customer support during the free trial period to help customers make the most of the product.

Using Freemium Model

The freemium model provides basic services for free while offering additional features or services for a fee. The freemium model is useful for meeting various customer demands. For example, it can satisfy both small companies that need only basic features and large companies that need additional features.

Example: Jira’s Pricing Strategy

Jira is a representative example that offers a free version, a free trial version, and a “contact sales” option for enterprises. Initially, customers can use the free version to experience the basic features of the product and then upgrade to the paid version as needed. This strategy effectively meets the demands of various customer segments while converting them to paid customers.

Validating Customer’s Willingness to Pay

Initially, it is good to first confirm the customer’s willingness to pay. Validate people’s willingness to pay before introducing free trials or freemium options. Providing a free trial can cause problems if customers do not convert. Therefore, closely monitor customer reactions during the free trial period and adjust strategies as needed.

Key Considerations

  • Free Trial Period: Set the free trial period not too long or too short, allowing customers to fully experience the product.
  • Distinguish Premium Features: Clearly distinguish the features of the free and paid versions, making customers feel the need to upgrade.
  • Continuous Customer Support: Strengthen customer support during the free trial period to ensure customers fully appreciate the product’s value.
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7. Simplicity

Do not complicate the pricing structure in the early stages. A simple pricing structure makes it easy for customers to understand the value of the product and make decisions. This section explains how to maintain a simple pricing strategy in the early stages.

Importance of Simple Pricing Structure

In the early stages, it is important to maintain a simple pricing structure so that customers can quickly understand the value of the product and make decisions. A complicated pricing structure can confuse customers and delay purchasing decisions. [A simple pricing structure promotes customer purchasing decisions and facilitates initial market entry].

Offering One Price

In the early stages, it is good to offer one price. This allows customers to focus on the value provided without comparing various options. Test different prices to find the optimal price.

Collecting Feedback Through Customer Interviews

When setting prices, it is important to collect feedback through customer interviews. Through conversations with customers, understand how they perceive the value of the product and what they think about the price. This can help adjust the pricing strategy and set prices that meet customer demands.

Example: Mailchimp’s Initial Pricing Strategy

Mailchimp attracted many customers in the early stages by maintaining a simple pricing structure. They provided a free version and adopted a simple structure offering more features in the paid version. This allowed customers to try the free version and upgrade to the paid version as needed.

Testing Various Prices

Initially, test various prices to find the optimal price. This allows you to observe customer reactions and establish the most effective pricing strategy. Offer various price options, guide customer choices, and adjust prices based on feedback.

Key Considerations

  • Maintaining Simple Pricing Structure: In the early stages, maintain a simple pricing structure so that customers can easily understand and decide.
  • Offering One Price: Offer one price to reduce customer confusion and clearly convey the product’s value.
  • Collecting Feedback Through Customer Interviews: Collect feedback on prices through customer interviews and adjust the pricing strategy accordingly.
  • Testing Various Prices: Test various prices to find the optimal price and adjust based on customer reactions.
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Conclusion

Appropriate pricing is a critical factor that determines the survival and success of a company. The 7 pricing methods explained above can help B2B companies address various challenges. The key is that each method is based on customer value perception and market conditions.

  • Price does not matter in the early stages: Early startups should quickly gain customer feedback and attempt market entry through simple pricing to validate product demand. This is an important step to confirm initial customer willingness to pay and improve the product through feedback.
  • Do not ask customers how much they will pay: It is important to understand customer expenditure and the ROI of the product rather than directly asking about prices. This helps to identify the actual value customers are willing to pay.
  • Clearly convey the value proposition: A clear value proposition is crucial for customers to easily understand the value of the product and pay the corresponding price. Customers should recognize the pain points of the product and believe that our solution can solve those problems.
  • Customers decide prices through comparison and analysis: Set prices through comparison with competitors, similar software, and ROI analysis. This is an important strategy for customers to choose our product.
  • Understand the budgeting process of companies: Deeply understanding the budgeting and purchasing processes of customer companies allows for the development of more effective pricing strategies. This is particularly useful in managing long sales cycles and complex purchasing processes in the B2B market.
  • Utilize free trials and freemium models: Free trials and freemium models are effective ways to attract early customers and allow them to experience the product’s value. This can verify customer willingness to pay and convert them to paid customers.
  • Do not complicate the pricing structure: In the early stages, maintain a simple pricing structure so that customers can easily understand and decide. It is important to test various prices to find the optimal price.

These strategies aim not only at simple pricing but also at accurately understanding customer needs and market trends, and establishing flexible and effective pricing strategies accordingly. This is a key factor that ensures not only short-term revenue growth but also long-term customer satisfaction and sustainable growth of the company.

Ultimately, the pricing strategy of B2B companies should be based on trust with customers, pursuing continuous improvement through a clear value proposition and flexible approach. This will enable companies to gain an advantage in the competition and achieve greater success.

Reference: Focused Chaos, “How to Price an Early Stage B2B Software Product”

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