The Power and Pitfalls of Pricing for Small Businesses and Startups
Get it wrong, and you’ll kick yourself. Get it right, and you’ll probably still kick yourself because you won’t be sure you got it right. How do you price your product perfectly? You don’t.
The real question is: how do you properly utilize pricing?
Pricing is a crucial yet often underutilized tool for growth that can drive scalable growth without product changes. Despite its potential, most avoid touching it because of the risk and the massive amount of misinformation about pricing.
IMPORTANT SAFETY NOTE: Before we dive into it—this is for products, goods, CPG, and SaaS. This absolutely does not apply to services like consulting, lawyers, etc. Different rules apply to value-based pricing (this is more like dark magic).
Let’s get into it.
Understanding the Power of Pricing
Did you know that a McKinsey analysis suggests a 1% improvement in pricing can boost profits by up to 11%? The potential gains are enormous, yet many companies hesitate to test new pricing strategies due to fear of user backlash or the complexity of execution.
In a survey of 60 software companies, 50% admitted they've never run pricing studies, and only 25% have A/B tested pricing changes. However, those who do invest in pricing often wish they'd started sooner.
Case Study: When we adjusted Strava Craft Coffee’s pricing, it faced initial backlash but ultimately saw a significant uptick in revenue and user engagement.
We will cover some practical approaches to testing pricing below, but first, you should be aware of the four most common MBA-style methods for pricing:
Van Westendorp Method: This asks customers four key questions about pricing, though it has limitations due to hypothetical bias.
Becker-DeGroot-Marschak (BDM) Method: This adds an incentive to ensure customers reveal their true willingness to pay.
Multiple Price List (MPL): This method simplifies decision-making by presenting a list of prices for customers to choose from.
Discrete Choice-Based Method: This involves presenting multiple product options with different features and prices, asking customers to choose their preferred one.
The Practical, Affordable Way
It’s good to know these methods, but let’s be real: you need the budget and time to do those tests.
Here are three ways to do pricing on a budget.
1. A/B Testing with Landing Pages
Create multiple landing pages for your product, each with different pricing. Use a tool like Google Optimize, Unbounce, or Optimizely to run A/B tests. Direct traffic from your ads or email campaigns to these pages and measure conversion rates to see which price point performs best.
Steps:
Design two or more landing pages with different prices.
Run equal traffic to each page.
Analyze which page has the highest conversion rate.
2. Surveys and Customer Interviews
Conduct surveys or interviews with potential customers to gauge their willingness to pay. Tools like Google Forms, SurveyMonkey, or Typeform can help you create and distribute these surveys.
Sample Questions:
What price would you consider too expensive?
At what price would you think the product is a good deal?
How much would you be willing to pay for this product?
3. Competitive Analysis & Research
Research competitors' pricing to understand the market standard. Position your pricing in a similar range, then adjust based on customer feedback and sales performance.
Steps:
List direct competitors.
Analyze their pricing structures and offerings.
Position your product competitively, slightly higher or lower, based on value and feedback.
Mastering pricing is not just about finding a magic number; it’s about understanding and influencing customer perceptions and behaviors. Start exploring these methods today.