After presenting your pricing to Early Adopter customers, you probably received feedback reflecting their skepticism about the value proposition and their expectations for favorable pricing terms. As a result, you decided to lower your pricing (at least in the short term) and jump into the market. But then you had the following dilemma:
- Would the short-term pricing impact your startup’s valuation?
- How to reflect new pricing in your financial model?
- How to present it in your Equity Story?
Following are Pricing tips for startups jumping into the water:
- Validate your value and pricing: you must ensure that the long-term price list is rock solid. You should know how to defend it. Therefore, evaluate your value proposition and product offering, quantify it, and benchmark it vis-à-vis the competition. That would be your baseline pricing (long-term) for the period when the customer fully realizes of your product’s value.
- Early Adopters: remember that Early Adopters will be your initial references and, eventually, your “champions”. These are the “force multipliers” who can trigger a domino effect. Support their decision to start using your product. “Free trial period,” discounts, upgraded packages, and installation & implementation services should be part of your toolset. If you're going to cross the chasm, you must close these deals!
- There is only one customer pricelist: even for Early Adopters, start with your main pricing and subtract the discount or add a ceiling. It creates the mindset that your value is tied to that main pricing and is yet to be proven. But once it does – there will be no discounts (i.e., temporary). This should help your future upsells efforts too.
- Two-Phase approach: you should separate the two calculations in your financial model since they are measured differently. In the first phase (Early Adopters), you can use the (temporary) discounted pricing while categorizing all discounts as “marketing cost” (from a business perspective, not the accounting one!). While the second Phase (scale), you switch to your long-term pricing and measure unit economics and profitability.
- Close the First Phase ASAP: Early adopters are like house scaffolding, and their pricing should not be used as "regular" customers arrive. Remember, there is no distinct “aha moment” when you cross the chasm. Therefore, Continuously keep testing and validating your pricing with the market.
- Analyze your Unit Economics in the Second Phase: indicators like CAC, LTV, Gross Margin, and Months to Recover CAC, should be measured and presented only in the Second phase, which is after crossing the chasm.
While considering the above, the two-phase pricing will blend much smoother into your Equity Story.
