It’s not surprising that pricing plays a large role in the success of a startup. When asked if he could put any one piece of advice to founders on a billboard in San Francisco, Marc Andreessen famously said, “raise prices.”
However, pricing is more than what you charge your customer, it also includes how you incentivize engagement and create margin as well. How does this work in practice for two of the most common pricing structures?
Incentivizing Engagement with Consumer-based Pricing
Consumer-based pricing works well when you are working to create a “sunk-cost” feeling or need your users to change behavior, rather that be from an existing software or workflow.
For example, we work with startups in industries that still use Excel, or if they are really advanced SQL, for most of their workflows pertaining to data entry and analysis. Charging these customers on per-use basis would be more likely to result in end-users giving up on the software at the first sign of complication (i.e. MVP / new features have a higher bar to clear), or never using it again a few weeks after on-boarding.
Instead, a per-seat charge or a flat-fee creates a sunk-cost feeling within the organization. The internal manager or champion who initially went to bat for you is now incentivized to show this new cost isn’t going to waste.
Does this create a higher-barrier to sales? Maybe, but sales were always going to be important. More importantly, you now have allies working to ensure engagement with your product in their organization due to the effects you’ve had on the budget and their reputation at the company.
Creating Margin with Consumption-based Pricing
Consumption pricing is charging based on how much or often a consumer uses the product. The two most obvious examples would be almost any cloud storage provider or Invision’s per workflow product.
This structure is perfect if your product could be accessed by an entire group or division with one login and not lose effectiveness. In the example above, if pricing was consumer based (per seat) a design team could easily create one log-in to create as many prototypes as needed.
If Invision used a per-seat structure, it’s unlikely they could start pricing at $25/mo. Instead, it would likely be in the neighborhood of $10/mo. This structure likely allowed them to charge $15 more per month AND make it feel like a value to the end user.
Pricing often gets overlooked in the foundational aspects of company building. Yet, when structured correctly, pricing strategy can create incentives that become powerful catalysts for early adoption and create extra margin over the long-term.
Originally published at kevindstevens.com on August 6, 2018.
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