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Value-Based Pricing for Start-Ups

Photo Credit: Helena Lopes

Ten years ago, I started running pricing workshops for start-up accelerators. As part of the meet-and-greet, I would ask entrepreneurs to describe their pricing model to me. Nine out of ten participants would reply with something along the lines of “Oh, we’re building an audience of Facebook Like / Twitter Followers / YouTube Subscribers….and we’ll just monetise later”.

I’m guess that most of those respondents have either since gone out of business or realised that there is no bank in the world that accepts a deposit of social media audiences. Because ten years later, nine out of ten entrepreneurs in the same workshops can define their pricing model, having realised firstly that the second question prospective investors ask them (after their elevator pitch) is “what’s your pricing model?”, and secondly, they actually provide value from day 1, so why not charge for what they’ve created?

There’s so much more to pricing than what can succinctly be compressed in a 378-word treatise. So here are three pricing rules that should guide the launch or growth of your start-up:

Firstly, customers do not care about your costs. They care about the value you provide, and so should you. What is “value”? Well a good starting point (and potentially a basis for value-based pricing) is to quantify how you can increase your customers revenue, reduce their costs or minimise their risk. But there is a caveat…

Value is subjective. You don’t determine what value is, the customers does, and often what one customer values will not be the same as the next customer;

But coming to your aide is rule number three: value is contextual. Richard Thaler’s famous “Beer on the Beach” experiment in the 1980’s found people were prepared to pay more for a cold beer purchased from a five-star hotel than from a run down grocery store. Traditional economics assumes the willingness to pay for the same product should be identical in both locations. Thaler, the godfather of behavioural economics, found that if the context where a product is presented is different, its price can be different.

As you grow your start-up, ask yourself, have I got five-star hotel pricing, or do I have run-down grocery store pricing?

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