Pricing strategies for startups

Strategic pricing makes it possible to optimally serve the market, satisfy customer needs and achieve long-term competitive advantages. The psychological subtleties should not be ignored here: Sometimes it is more important to give the customer the feeling that they have made the right decision - regardless of whether, objectively speaking, they really have. This is why basic strategic approaches are important and varied, and we take a closer look at four common ones below.

Penetration strategy: making a name for yourself with low prices

If a market is dominated by established providers, the penetration strategy can be successful. The startup starts with low prices and plans to raise prices later. Slack is an example of the successful implementation of this strategy: it started with low prices, became indispensable and was then able to successfully push through price increases. Rapid market penetration is offset by low margins and the risk of churn in the event of price increases.

Maximizing the price: achieving the highest possible revenue

The strategy of achieving the highest possible price, on the other hand, is particularly successful in markets with low levels of competition. Here, start-ups try to achieve the highest possible price that customers are willing to pay. Tesla, for example, concentrated on the production of premium electric vehicles in the upper segment in the first few years in order to appeal to customers who are prepared to pay more for the innovation and performance of an electric car. However, a dynamic view and adjustment of prices is essential here at all times.

Skimming: lowering the price step by step

The skimming strategy consists of starting with a higher price and gradually lowering it. This enables you as a startup to win customers and assert yourself in a changing market. GoPro also pursued a skimming strategy at the beginning by launching its action cameras at a higher price and focusing on customer-oriented niche markets - with the market entry of Xiaomi, it had to lower the price and was able to adapt to the market. The market structure should serve as a guide to focus more on margins through skimming or to postpone the strategy in favor of capturing market share.

Premium strategy: Establishment as a premium brand

The premium strategy stands in contrast to the penetration strategy and enables even young companies to charge a higher price than the market standard and thus position themselves as a premium brand. Although this can represent a customer barrier in the initial phase, it is a sensible option in the case of special and high-quality products. Salesforce positioned itself in this way early on in the B2B software sector, and this strategy is also particularly relevant in brand-oriented markets such as consumer tech or fashion. It is challenging and should be closely interlinked with other marketing factors such as brand and positioning, but offers potential benefits such as customer loyalty, profit margins and a strong brand identity.

After considering the strategic approaches, choosing the right pricing method is crucial. Many start-ups face the challenge of having no reference point for market entry and no price range. In addition to the relevance of direct contact with (potential) customers, we consider three methods to be a good basis for an initial orientation.

Cost-based pricing

In cost-based pricing, internal costs are taken as the starting point. Direct and indirect costs are taken into account and a profit mark-up is added. Everlane shows an example of this approach with transparent pricing on every product page. The advantages of cost-based pricing are that it is transparent for the customer, easy to calculate and can be adapted to the company's own planning and requirements. The disadvantage lies in a "blinkered view" without consideration of customers and competition and the risk that customers are less interested in costs than in perceived value.

Competition-based pricing

Here, the startup orients itself to competitors' prices through extensive research via websites, industry reports, studies or direct contact. This can be a good guide to existing price categories, particularly in "crowded" markets with various options and features. The strategy can also be implemented well on this basis: Do we want to enter the market with our "low end" product and set lower prices or do we want to be more overpriced due to our USPs or the thin occupation of the market?

Value-based pricing

The options mentioned at the beginning are often used as guidelines for the application of this variant: Value-based pricing is based on the customer's perception of the product. The focus is on setting a price that corresponds to the perceived or actual value achieved - for brands such as Hermes, a subjective value tends to be the basis; for process-optimizing SaaS solutions, a monthly time and cost saving of, for example, EUR 10,000 can also be the basis for setting the price at 10% of the quantified added value. This variant offers advantages in markets that are less brand-loyal and tend to make value-oriented decisions. The perceived value can be increased at any time through targeted product optimization or marketing/advertising measures, which can justify a higher price point.

As a small digression, while strategic approaches and pricing are crucial, startups should also consider the choice of the right pricing model. SaaS companies alone use different billing models here: Stripe's pay-as-you-go model (payment for each individual transaction) creates a low barrier to entry with no commitment for the customer, but does not offer predictable revenue levels compared to Netflix's fixed flat-rate pricing. In other models, such as Salesforce's tiered pricing, the variants offered (e.g. bronze, silver and gold) offer precise customization, while Sigma's per-user pricing conveniently and flexibly targets all customers as they pay according to the number of software users. As with the strategic approaches: Choose your model wisely, look at working and dysfunctional models of existing providers and again be close to the customer who prefers certain models in terms of billing models or also wants changes and new models.
 

Finally, we take a look at experiences from the Bavarian business plan competitions and our coaching: What are classic mistakes in pricing? As examples, we report on four classic and common misconceptions:

1. Too much inside-out thinking
   Too often, prices are set without direct customer involvement, with companies relying solely on benchmarking, competitor analyses and research. This is a critical mistake, as customer opinions and direct discussions are essential for developing the right pricing strategy.
2. Market entry price too low
   Another mistake is to set the market entry price too low, often for fear of losing customers. However, a price that is too low can limit the growth of the company. Balanced pricing is crucial here in order to find the right positioning in the market.
3. Unfamiliar and complicated pricing structures
   As briefly touched on in the digression: Complicated pricing structures that deviate from customers' habits are another stumbling block. In highly competitive markets, companies should rely on familiar billing models so as not to deter customers - or find new models that reduce existing pains and create an advantage for both sides.
4. Lack of flexibility and customization
   A final common mistake is that founders stick to rigid pricing approaches, even when the company changes. Flexibility and adaptability are crucial here in order to keep pace with growth and numerous developments.

The recommendation is therefore: as with the "4Ps" in marketing, also base your pricing on the "3Cs" of customer, competition and costs. Combine different methods and keep a dynamic eye on relevant areas such as customer needs, the competitive situation and internal costs, and continuously adapt your pricing strategy to changing conditions.

The art of pricing for start-ups lies in the balance between different approaches and methods. A smart strategy that takes market conditions and customer needs into account, combined with a well-founded price calculation and a suitable pricing model, is the key to long-term success. The ability to react flexibly to changes and keep an eye on customer loyalty enables start-ups to assert themselves in a dynamic market and grow successfully - we are looking forward to seeing your concept in phase 2 of the Bavarian Business Plan Competitions that takes all these points into account.

Participate in phase 2 of the Bavarian business plan competitions until April 8th

Founders from all over Bavaria can enter the second phase of the business plan competitions until April 8th, even independently of participating in phase 1. The focus is on the business model, marketing and sales.

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Why take part?

"Winning was an incredible boost for us. It made us heard beyond the borders of Bavaria time and time again: as the winner of a Bavarian startup award, you are immediately taken seriously, even internationally. The evaluation of the pitch and of course the business plans also help enormously when it comes to convincing investors of your mission. So we can only advise every startup to seize the opportunity and take part in the BayStartUP competition," says Eye-Able, winner of the Business Plan Competition Northern Bavaria 2022.