Over 90% of businesses underprice when they start. While there has been a lot of attention on guiding startups toward finding product-market fit, the emphasis on business model fit has been lacking. Yes, it is much more important to achieve product-market fit before even worrying about pricing; however, the disproportionate attention on this has led to many companies applying a lackadaisical approach to pricing. Poor pricing has as much power to destroy your business as does a terrible product. BOTH need to be in alignment.
The good news is that pricing isn’t as mystical or complicated as you might think. There are proven business models and frameworks that have been vigorously and scientifically tested. Your goal should be to identify and iterate on the one that works best for you.
I won’t dive into the intricacies of various business models, but I do want to dedicate some time to discuss commonly overlooked factors that affect pricing and provide specific frameworks to assist you in establishing (or revising) your initial pricing.
Brand Values & Pricing
While it’s not catastrophic to set pricing based on what other competitors are doing in the market, doing so without thoughtful intention can lead to attracting the wrong customers or creating mismatched expectations, resulting in unnecessary friction.
Have you ever found yourself in a situation where you’re consistently trying to pull on a door that only opens when pushed? These are referred to as ‘Norman Doors‘, a term coined by design expert Donald Norman. Norman argues that people instinctively respond to the design of objects. Thus, when the design doesn’t align with the expected function, confusion ensues.
This mismatched expectation is what leads to a poor user experience. It applies not only to product design but also to all forms of communication: sales, marketing, and even something as simple as the pricing of your offering. For instance:
Should you charge $299 or $300?
This seemingly trivial decision, barely noticeable on your balance sheet, highlights the importance of beginning your pricing journey with a clear understanding of your company’s or brand’s value. Common knowledge suggests $299, despite the mere $1 difference (even if we acknowledge the psychological fallacy we fall victim to), creates the impression of a lower price compared to $300. However, understanding the psychological rationale behind this tactic alone is insufficient without awareness of the contexts in which it is effective.
If quality is one of your company’s core values and you provide premium solutions, you might benefit more from charging $300. Affordability and value-for-money aren’t always the messages that will resonate with your customers. Sending the wrong signal or even leaning into discount-oriented campaigns will only lead to attracting transactional customers when you should instead be targeting relational customers. This may result in poor conversion, or worse, negative reviews and complaints about your solution being overpriced.
There is no right or wrong approach. If your business is designed to cater to bargain seekers, you might want to send the right signals to communicate that your offerings provide good value for money. Your task is to be mindful and not blindly execute ideas or campaigns. Begin your pricing journey (and, in fact, every company decision) by understanding the values that will guide your evaluation of the pros and cons of your choices. Values are the HOW to your WHY (your company mission).
Displaying Pricing
If you sell a high-ticket solution or if pricing depends heavily on complex quotations based on many variables, you might notice that it’s common in your industry to either display a lower price (out of concern that prospects might be scared away due to sticker shock) or not to display pricing at all.
Recall what we discussed in Expectations. What do you think happens when someone expects a lower price but then finds out the actual price is higher after going through a consultation? It leaves a sour taste in their mouth! Instead, it’s better to overestimate (but not outrageously) and pleasantly delight them when they find out it costs less than expected.
What about hiding pricing entirely and asking customers to reach out for a quote? Tune in to Episode #62 of the Empire Builders podcast to hear Matthew Burns from Armadura Metal Roof talk about why you should transparently display pricing on your website.
As a closing thought, it’s crucial to understand that price is a reflection of value. Don’t be afraid to charge what you’re worth! Many founders, especially those who are self-employed or in service-based businesses (e.g. consultants, artists, and even dentists who own their practice), face imposter syndrome and end up underpricing not due to a lack of value but because they lack confidence.
If you’re running a social venture and do not want to monetize directly from your beneficiaries (e.g., students or homeless individuals), you’ll need to identify stakeholders who are willing to pay and ensure your offerings also create value for them. The price you charge should be proportional to the value you provide to them, not to your beneficiaries.