Price Before Product

Pricing is more than just a dollar figure - it’s the best indicator of what your customers want and how much they want it: If they are willing to pay for it, they want it - it’s as simple as that. This ultimately makes pricing the single most important factor as to whether your product will make money and as a consequence whether your startup will succeed.

However, most startups think about what to build for a long time before they even consider the price. Oftentimes, they treat pricing as a completely separate decision from the features that should go into a product. By doing so, they fail to put the customers’ willingness to pay at the core of their product design. Which can be a very costly mistake - not getting your customers to pay for your product is one of the most common reasons for failure in startup land.

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Top three rules for monetizing your breakthrough product

There’s much more to unpack about how to think about pricing as an early stage startup.

In his great recent podcast episode on his Starting Greatness podcast with pricing guru Madhavan Ramanujam, Mike Maples explains the three rules of monetization which are a good starting point:

1. Have the willingness to pay discussion early and be direct
2. Think about how you charge, not just what you charge
3. Don’t settle for one size fits all - segment aggressively and focus

If you want to dive deeper on pricing for startups, I highly recommend reading Madhavan’s book Monetizing Innovation and see the last section of this email for more insightful content on the topic.

See here for the podcast episode from Mike with Madhavan and here for Mike synthesizing his insights from the conversation.

1. Have the willingness to pay discussion early and be direct

This cannot be stressed enough - even if it doesn’t seem natural - talk to your (potential) customers about pricing as early as possible!

Ideally, you have pricing discussions with them before you even have a product. Front loading the question not only comes with the advantage that your customers won’t be in the mindset of negotiating the price, but they’ll also give you tangible feedback that helps you prioritize what to build.

As you do that, don’t ask questions such as “do you like my product?” - rather ask e.g. “would this be worth $100 to you?”. Or more specifically, try to understand their price ranges:

• Acceptable: At what price would they consider the product a steal?
• Expensive: At what price would they consider the product expensive?
• Prohibitive: At what price would they laugh you out of the room?

Alternatively, Rahul Vohra from Superhuman used a slightly different framework to set the price for their email client:

• Cheap: At what price would you consider Superhuman to be priced so low that you would feel the quality could not be very good?
• Bargain: At what price would you consider Superhuman to be a bargain and a great buy for the money?
• Expensive: At what price would you consider Superhuman to be starting to get expensive? I.e. so that is not out of the question, but you would have to give some thoughts to buying it (this is the question Superhuman paid most attention to when figuring out their pricing)
• Prohibitive: At what price would you consider Superhuman to be so expensive that you would not consider buying it?

For Superhuman, the median answer to the third question turned out to be $29 per month. A few conversations with pricing experts later, they rounded up to $30 per month because when you end a price in the number nine, it signals value rather than quality and Superhuman is all about signaling quality. That’s how they landed on $30 per user per month.

Going through this exercise, you want to make sure to also get objective info around:

• How to qualify each of these prices / price ranges and have it inform your segmentation (see rule #3).
• On top, this exercise should also inform what features your customers value / are willing to pay for and therefore what you should prioritize in terms of building.

2. Think about how you charge, not just what you charge

It’s not just important to think through how much you should charge for your product and what that implies (e.g. is it a discount product vs a high price / high quality one) but it’s even more important what you charge for - i.e. what is your “value metric”?

To determine your value metric, think about the ideal essence of value for your product — what value are you directly providing your customer? As Patrick Campbell and Lenny Rachitsky put it in their great piece How to Price your SaaS Product:

“If you get everything else wrong in pricing, but you get your value metric right, you'll do ok. It's that important. Partly because it bakes lower churn and higher expansion revenue into your monetization. […] In B2B, it's likely going to be money saved, revenue gained, time saved, etc. In DTC, it may be the joy you bring them, fitness achieved, increased efficiency, etc. Obviously, we can't measure all of these, but if you can, and your customer trusts your measurement (meaning you say you saved them $100 and they agree you saved them $100), that’s your value metric.”

There are many different options with regard how you can charge, including subscription pricing, freemium (basic free-to-use product, supplemented by additional paid versions), usage based pricing (cost tied to usage), per seat pricing, per active user pricing, per feature pricing, etc.

To figure out how to best charge for your specific product and customers, figure out how each customer would accept which pricing option relative to how they run their business (not your business): Think about their billing cycles, planning cycles, decision makers, tax incentives, or other indicators that might inform their preferences. On top, ask yourself about the incentives the different pricing options set - e.g. if you want to get as many users to use your product, per seat pricing may not be the best option.

For startups building a breakthrough product, a common failure mode on this dimension is to immediately key off your competitors’ pricing strategy as it draws a direct comparison. If your product is a breakthrough, you don’t want a direct comparison - you want to force a choice instead.

3. Don’t settle for one size fits all - segment aggressively and focus

While VCs want startups to think big when it comes to the addressable market, focusing on an initial beachhead is mostly the winning strategy for early stage startups (even if there is some debate about that).

In line with that, rather than build one product with one price for the entire market, identify the optimal fit between the most important segments and the best features. I.e. the key word here is customer personas - an often used but not very well applied approach.

Have a look at this template from Patrick Campbell and Lenny Rachitsky to get to quantified personas and check out Superhuman’s product / market fit engine on Coda.

Once you have narrowed down your customer persona(s), price specifically for each target segment / persona.

At a high level, the five key principles of segmentation are:

1. Cluster customers according to their willingness to pay, value proposition and needs data.
2. Then ask yourself if there are clear fences between your segments? E.g. features one segment strongly wants but others don’t? The critical test here is to see if you can sort your clients into the clusters you’ve come up with in step 1.
3. Fewer is more - start with three to four segments and then expand gradually until you reach the optimal number. There is a trade-off here: The fewer segments you have, the less homogeneous and distinctive they will be vs. the more segments you have, the higher the complexity (do not underestimate this, more segments add significant complexity for sales, marketing, etc over time).
4. Do not try to serve every segment - figure out which ones are best in line with your commercial and financial goals as a business: Use market sizing to make sure a segment delivers enough value to make it worth it plus estimate how many customers you can acquire and keep and at what prices. Then separate the attractive segments from those that don’t make business sense.
5. Once you’ve defined your segments, make sure to describe your segments in a way where you can address them: Each segment should have observable criteria for customizing your sales and marketing messages. And all segmentation models should be actionable above all other things - this means that in writing, internet banner adds or any other marketing and sales messages, your startup must describe your target segments as precisely as possible.

A great post to understand the process and impact of proper segmentation is Rahul from Superhuman’s post on the First Round Review - have a look.

Without a price, you don’t have a product

In summary, designing your product around price will get you the furthest of any strategy because it forces you to think early and often about what your customers value and what features or tiers of features will maximize your success.

Or as Mike puts it in his podcast: “If you want to transition from hoping to knowing whether your product will be successful, make price your core focus - it will drastically increase your odds of achieving greatness”

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