Hi there -
Here is this week’s “1 principle, 2 strategies, and 3 actionable tactics” for running lean…
1 Universal Principle
“Don’t Price Your Product Like An Artist.”
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A lot of first-time founders price their products like first-time artists.
After finishing their masterpiece, they total the price of the canvas, paint, and paint brushes. Then, slap a reasonable markup to come up with a price.
They are in awe years later when that piece fetches a price at an auction with a few additional zeros at the end.
Pricing art is hard because art is subjective. Products aren’t.
In today’s issue, I’ll explore why and how you should command premium pricing for your product.
2 Underlying Strategies at Play
I. Don’t lower pricing. Raise it.
Contrary to popular belief, there is no competitive advantage to being the lowest-cost provider unless:
a. You have an unfair advantage up your sleeve that allows you to compete on razor-thin margins like Amazon and Walmart or
b. You’re building an undifferentiated commodity product, which I hope you’re not.
For most startup products, lowering pricing is a race to the bottom. You should strive instead to raise it, not lower it.
II. Setting price is your job, not your prospect’s.
Next, many people set pricing based on perceived affordability. For instance, startup founders are cheap, so we must lower our product prices. This is a false proxy.
It’s also common to see people asking prospects what they’d be willing to pay. I can’t think of any logical reason a prospect would ever give you a fair pricing answer.
They either:
- won’t know the fair value of your product because they’ve never used it and will guess and lowball pricing or
- they’ll know and downplay it anyway to get a good deal.
It’s not the prospect’s job to set pricing. That’s your job.
3 Actionable Tactics
I. Establish a business model goal-based pricing target.
Rather than pricing against your customer segment, product’s value, or cost structure, you should first set a pricing target based on your business model goal or annual recurring revenue target.
For instance, there are only four (reasonable) ways to build a $1m a year business:
- Attract 1m leads to acquire 10k customers paying you $100/year
- Attract 100k leads to acquire 1k customers paying you $1k/year
- Attract 1k leads to acquire 100 customers paying you $10k/year
- Attract 100 leads to acquire 10 customers paying you $100k/year
Each approach is a different game with different strategies, tactics, and tradeoffs for winning.
Pick based on the game you want to play and think you can win.
This is the essence of founder/model fit.
II. Hit your pricing target by stacking value.
Next, assemble an offer commensurate in value. It’s important to emphasize that an offer is not your product but how you deliver your product’s value.
For instance, I could take my Lean Canvas product and price it as:
- A $100 SaaS tool,
- Bundle it with a course and charge $1,000 or
- Bundle it with consulting and coaching and charge $10k or higher.
Fair pricing should be anchored against your prospect’s existing alternatives and the value you deliver.
As I’m a fan of creating mafia offers, not just offers, I like to aim my offer to be an order of magnitude better than both.
A mafia offer is an offer your customers cannot refuse.
III. Not all games have to be single-player games.
Finally, it’s important to recognize that users and customers can be different.
Users use your product to create value, while customers pay for that value.
Sticking with my earlier example of startup founders, how much should a tier 1 startup accelerator, like Y Combinator, charge startups in program fees?
Does $71.5k per startup seem about right to deliver a high-touch cohort experience and match startups with investors on Demo Day?
But wait, you say. YC doesn’t charge startups but invests $125k in exchange for 7% of equity.
Well, equity isn’t free, and here’s the portfolio math behind their business model:
- A typical YC graduate aims to raise investor-funding at a 12m valuation on demo day.
- They keep 7% of this $12m valuation for themselves: $840k minus the $125k = $715k
- Not all YC startups succeed, so risk adjusting with a 10% success rate lowers their effective pricing to $71.5k/startup.
That's all for today. See you next week.
Ash
Author of Running Lean and creator of Lean Canvas
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P.S.
For more on setting business model goal-based pricing, see this week's video from my YouTube channel:
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