Why is this book so important? One of the biggest lessons I have learned within the startup landscape is that even though pricing, together with the business model, remains by far the lever that most impacts revenue, the subject is a sensitive one.
Pricing is a strong — but often underused — tool available to capture a share of value created for customers
Pricing is one of the biggest challenges that startup face. The book is a practical toolkit that positively influences the pricing strategies of startups. It reveals insights in the different pricing methods and tactics used by successful companies.
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ONE TWO THREE FOUR
FIVE SIX SEVEN
PRICING PRICING METHODS MULTI-AXIS PRICING PRICING STRATEGIES
FREE OR PAID FINAL WORDS CONCLUSIONS
Slides 3-9 Slides 10-13 Slides 14-17 Slides 18-21
Slides 22-25 Slides 26-27 Slides 28-29
You can always pay cheaper,
but is this what you want?
Pricing Determines Your Market Position
Commitment of money is
a very powerful validation of
your business model.
The price your customers are willing to
pay validates to which degree you have
nailed the solution.
Pricing is one of the most sensitive
topics in business. It will determine your
market position, whether or not your
customers can buy from you, the sales
and distribution channels and whether
or not you can provide the level of
service expected by your customers.
Most of us determine prices using
competitive research and / or cost
estimates. A high price may result in less
customers whereas a lower price can be
seen as leaving money on the table.
Often, the price stays where it is, never
knowing how many more customers you
could have had or how much money
you're leaving on the table.
Price is the dominant factor for
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A price increase of 1% results
in 11% increase in profit.
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The Relationship between Price and Customers
A higher price means less customers.
At a $10 price point: 500
customers will buy.
At a $20 price point: 300
customers will buy.
At a $50 price point: 50
customers will buy.
At a $100 price point: 5
customers will buy.
$10 $20 $50 $100
The Optimal Price-Customers Tandem
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Correlating price points with potential clients is
called in economics, the demand curve.
Multiply the number of potential clients with
the respective price points to find the optimal
price-customers tandem to maximize revenue
$20 is the optimal price
The optimal price provides the maximumrevenue
not the highest margin or the largest number of customers.
Setting the Right Price
Price is not what you think you
can charge, but what your
customers are willing to pay
based on the perceived value.
Traditionally, the price is the sum between
cost and profit, which means that in order
to determine your profit, you need to
subtract the cost from the price, which
is known as lean thinking.
A better way to determine your profit is :
Sales – Fixed cost – Variable cost.
The better way for Start-ups to improve
margins is to increase volume with the
same fixed costs and less variable costs.
It should go without saying that the price
must always be higher than costs.
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Before setting the price, you need to ask
yourself the right questions:
• Why would people pay for my services
• What value will customers get from my
Once you identify the reason why
potential customers are willing to pay, you
can create a business model to capture
that value. In doing so, you need to have a
clear understanding of your product’s or
service’s value before you set the right
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What type of value are you
delivering? Make sure your
product or service offers more
than what the customers pay for.
The value hierarchy is the order of values
that influence business decision making.
Those values are:
A product’s features represent the basic
level of value delivered.
The advantage that a product offers.
This is a characteristic that competitive
products don’t have.
The benefit is the impact of your product
on the customers’ business often
measured as Return on Investment (ROI).
Benefit of the Benefit
At the end of the day, the decision maker
is a person that will take a risk with
adopting your product in the organization.
Often it’s important to understand what’s
in it for them to make the decision. This
value is called the benefit of the benefit
The Pain of the Pain
The pain of the pain is having a solution
for a problem that is a pain in itself.
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Factors Influencing Pricing
For a trader, selling is buying.
The purchase cost drives 80% of
the sales price.
For a manufacturer, selling is production-
efficiency. The production cost drives
80% of the sales price.
For products based on Intellectual
Property, such as software, SaaS and
web services, cost is driven by two major
factors: the cost of sales and the level of
support you want to provide.
Need (B2C) vs. Pain (B2B)
Return on Investment (ROI)
Must Have vs. Nice to Have
Doing nothing is #1 alternative
Alternative is often the use of
Internal Cost Structure
Type and Length of Contracts
There are 11 different pricing methods you can use
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1. SILICON VALLEY RULE OF THUMB
We charge this much because our
customers get at least 10 times that much
value. In other words the ROI is at least
10:1. You need to really understand
your customers and the value you
2. CUSTOMER INTERVIEWS
Don’t ask the customers for ballpark
pricing. It is better to explain your pricing
model. Usually the right price is the one
your customers accept, but with a little
resistance. Keep in mind that Price
Objection is in fact Value Objection.
It’s not the price that they are not happy
with. It’s the value they don’t like. You
need to know the customers’ willingness
to pay (value perception) and their ability
to pay (how, when, why, where, how).
Lookup the cost per click for relevant
search words, using Katalict. The price
of a “word” is a starting point to calculate
the cost of sales.
Fill in an estimate of your sales funnel
costs, conversion rates and the lead value.
The ratio between the cost estimate and
revenue estimate is the ROI for the sales
funnel. The simulation will result in the
cost of sales, often the largest cost driver
3. INDUSTRY BENCHMARK
The license model typically charges about
3 to 5 times as much as the SaaS model
for a lifetime license.
Calculate back, based on industry gross
margins: Software = 70 - 95%,
SaaS =60 - 80%.
This is a very effective method but it
requires that you know your cost
structure very well.
4. BREAK-EVEN POINT
You need to determine the potential
revenue, costs and margins. What is
the right price which ensures you have
a viable business? Simulate with halved
assumptions as Start-ups tend to
overestimate revenue and
LINK : KATALICT
7. DECOY EFFECT
Consider 2 USB keys. The majority will buy
USB key B since it provides much more
value for money comparing it to Key A.
When adding a cheaper USB key than the
initial two, the purchase will shift to Key A
thanks to the introduction of the Key C
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8. “BUY VS. BUILD” PSYCHOLOGY
Using this method, you can price your
product—on an annual basis—at 10% of
the equivalent "build" price if the
customers want to build it themselves.
For example, if the customer has to pay
$100,000 for building a similar product,
you can price your product at $10,000 per
year. In other words, you will provide your
customers 10 years of outsourced value
without a huge upfront cost.
As additional benefit, the customers get a
product that will continually improve,
compared to a static product they build
6. ANCHORING BENCHMARK
People can only understand relative value,
not the absolute one. Anchoring is
probably the most powerful force in
today’s economics as you can compare
your product or service to something
Take Steve Jobs for example. He
compared the $499 iPad versus a $999
laptop, making the iPad seem
inexpensive. Retailers are mastering this
art of using “suggested retail price” as
anchor, making your “special” price look
like a good deal.
A B C
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9. PRICING – DISTRIBUTION FIT
You need to ensure you have the margins
to accommodate resellers, distributors,
agents or affiliates. If you have a 40%
gross profit margin and a distributor
needs a 70% discount off the price, you’re
forever limited to direct-to-consumer.
You can still increase your pricing and
margins after-the-fact, or launch new
"premium" products to fix this problem.
You stack all of your competitors on a
pricing spectrum and decide where you
want to position yourself. The benefit of
this method is the use of external data
indicators that guide the pricing process.
Part of it is still guessing, because most
products are not completely the same.
You should never underestimate the
pricing power of established brands when
setting your price. At least you have a
fairly accurate view of the market.
11. INDUSTRY AVERAGE
The monthly average price point on a per
user basis, is between $26 and $75, with
the initial sale ranging from 6 to 50 users.
Typical discounts are 7-15% to those
customers that opt for longer agreements.
You should remember that churn is the
number 1 SaaS killer*.
*Source: Softletter Research
A must for a freemium business model
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Features, Users and Usage
The aim of multi-axis pricing is to increase
revenue. It allows you to capture more
revenue without putting off smaller
(budget) customers. In addition, it enables
to grow revenue from existing customers.
Multi-axis pricing is aligning value creation
with pricing as there are different types of
users extracting different levels of value
from your product or service. If done well,
it will lower the threshold for purchasing
while maintaining a path to grow the
customers as the usage increases.
Multi-axis pricing is often around the
following axis: Product Features,
Users and Usage.
Don't use more than 3 axis as
the human brain cannot process
more than 3 dimensions.
1. PRODUCT FEATURES
This is the most common way.
More functionality means higher price.
The more users using the product, the
higher the value creation and therefore
they pay a higher price (note that the price
per user is going down in this scenario).
More disk-space (Dropbox), more email
addresses (MailChimp), etc. are indications
of a higher value creation and therefore
justifies a higher price.
The most common axis of pricing
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Features, Users and Usage
These 3 axis are the most common ones.
But it is perfectly possible to have pricing
based on a service level agreement axis
Free: users need to find answers to their
questions in a FAQ.
Price X: users can email questions and
receive an answer within a number of
Price Y: users can call a hotline during
office hours in the specific time zone of
the company (not according to the
Price Z: users can call a hotline 24x7x365
DEPTH OF USAGE
Mailing List Size
Amount of Storage Used
Note that the Users and the Usage axis,
also impact your cost structure, so it
makes perfect sense to put some limits or,
even better, capture additional revenue.
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Salesforce.com is the biggest SaaS company in the
world and active since 1999. It’s an excellent case
as a benchmark for best practices. The pricing of
Salesforce.com is based on 2 axis : Features and
Salesforce.com is using 1 and 2 year contracts and
their monthly pricing is purely a marketing feature.
It’s not because of the fact that the Salesforce.com
pricing is displayed on the website that it’s fixed.
You can contact the call centre to negotiate
a volume discount.
For Salesforce.com, providing support and training
to their customers is not a cost but an additional
source of revenue.
The Pricing Model of Salesforce.Com
“Basic Support” is included in the price but in reality this is just FAQ.
“Premier Support” is +15% (except for Unlimited Editions)
“Premier Training” is available.
5 Maximum for Group
and Contact Manager editions
Additional elements to consider for your pricing strategy
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Set a Reasonable Price
Visit the graveyard to see companies that cut prices by 15%
to 20% to “cross the chasm”. Without doubt you need a
“reasonable” price. Reducing it further might not cause
sales growth but it will surely damage margins.
Instead of cutting prices, consider reducing adoption risk
by offering a performance guarantee or an attractive low-risk
NEGOTIATING B2B “BIGGER DEALS” PRICING
In order to negotiate bigger B2B pricing deals you need to make
sure you understand the market, your options and the other side’s.
You should also identify your absolute walk-away outcome and
decide on your ideal outcome.
It’s the side that has the most information who controls the deal.
Just ask questions and don't make statements. Everything is
negotiable, so negotiate everything. If the price is “too high”,
ask the following key questions:
• What is the number the customer is thinking of ?
• How did they come up with that number ?
“Instead of cutting prices, consider reducing
“It’s the side that has the most information who
controls the deal.”
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Discounts and “Special” Prices
Discounts work well for companies that compete based on price
and not on differentiation. Start-ups should give temporary
discounts only to prove product value (it is not lowering the price,
it is lowering the order for the specific time period).
Discounts are linked to upfront payments (i.e. pay for 12 months
and get 2 months free). The formula is simple: if the discount is
lower than the cost of capital, go ahead and bootstrap the
customer to finance your growth.
When dealing with pricing for pilot customers, you should never
do it for free. Instead negotiate a cost and a margin deal to pilot
the service. Keep in mind that an important condition for a pilot is
to build a relationship based on mutual trust.
It’s is ok for you to make money on the deal, businesses that don't
make money don't stick around to work with them in the future.
“Discounts work well for companies that compete
based on price”
“Negotiate a cost and a margin deal to pilot the
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In a two-sided marketplaces, the side with the highest
price sensitivity receives a subsidy in order to stimulate
demand from the other side.
The host received a fee to cover the cost of processing
customer payments (subsidy). Why? There are free
listing services in the market which create a barrier for
hosts to pay Airbnb high listing rates. Buyers are price
sensitive too, but Airbnb often is well below higher
priced market alternatives (e.g., hotels / BnBs).
The existing customers receive a subsidy ($10) for each
new user they invite. At the same time, those new
users get $10 too. The merchant gets a better deal
compared to the transaction cost of credit cards.
Two-Sided Marketplaces : Airbnb & Paypal
FREE OR PAID
Should your customers pay for using your product?
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The Freemium Approach
Make sure you establish the purpose of
your free package. Is it aiding viral growth
or is it hooking customers onto your
product and upsell them other products
You should also determine your ideal
ratio of free vs paid customers, in order
for you to run a sustainable and scalable
Your goal should be eating up your
competitor's market share and NOT
cannibalizing your own offer. Often
freemium is a way to go from B2C (free)
to B2B (premium).
The freemium approach is Tease, Please and Seize.
There isn't a standard template solution.
B2B is twice of B2C
(i.e. Evernote = 6%; Yammer = 15% conversion)
A typical Freemium service is 0.5% to 5% conversion range
TEASE PLEASE SEIZE
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The Freemium Approach
“A good free plan ideally should
be similarly to a free trial.”
Start with the premium part of freemium
first. Since your eventual goal is to charge
for your product anyway, why not start
there? You can always offer a free plan
later, like MailChimp did.
A good free plan ideally should be
similarly to a free trial. The difference is
that while a free trial is time-based,
freemium is usage-based.
Unless you’re deriving monetary value
from free users, the freemium model is
less of a business model and more of a
marketing tactic to fill your pipeline with
Pricing is one of the riskiest and most
critical part of the business model and
should be tested early on. Freemium
delays this learning.
Even though the operational cost of
carrying free users may seem low, they
aren’t zero. Unless free users are adding
participatory value (such as network
affects) they are an expense.
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Display and Transactional Pricing
Visitors to your website or landing page
can be divided into:
• Prospects who can't afford you.
• Prospects who can afford you but were
planning to spend less.
• Prospects who were expecting to pay
exactly what you charge.
• Prospects who were expecting to pay
The main question is: how big is
Companies work with forecasts and
budgets, therefore predictability is valued
highly. Transactional pricing is perceived
as a risk such as the inability to plan
Exception are industries that have a
transactional based business model: i.e.
per seat (airlines), per subscription (media),
per transaction (banks) etc.
If you have to choose between who signs
up quicker and who pays the most, pick
the former as they are early adopters and
have a better influence on your product.
In this case the cost of sales is lower and
even if they pay less money, it will be
easier to hit your target growth rate
You should also try to adapt your
message to the different groups:
"We're more expensive but we're better.
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Remember to Revisit Pricing
Pricing is not a one-time, set-it-and-forget-
it deal. Entering new markets, target
different segments, inflation-index,
new features etc. can be a reason to
A pricing strategy is a process that utilizes
multiple tactics. Unfortunately there is no
“one-size-fits-all” answer when it comes to
developing a pricing strategy. Pricing can
be validated but not made by anyone else
than yourself. Every paying customer is an
achievement so go find out why they pay.
Make sure you don’t over-engineer your
pricing strategy and make it difficult to
understand. Pricing is also a function of
marketing. Cash Flow is as important as
pricing, seeing that it’s the only reason
why business die.
Pricing is all about setting the
right perception: water is more
useful than diamonds, yet it is a
LINK : PAY NOW MODEL
LINK : PAY LATER MODEL
LINK : PAY NEVER MODEL
Things to consider when setting the right price
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The Dos and Don’ts Of Pricing
Research the optimal price per customer to maximize
Price is a continues process
Understand why customer will pay you (value)
Use industry gross margin as starting point
Use tactics such as anchoring and decoy
Take into (margin) account the possibility to work with
Start with the premium part of freemium
Offer transactional pricing to transactional businesses
Pricing is a function of marketing
Take Cash Flow into account
Set-it and forget-it
Cut prices to sell more
Overestimate Customer Lifetime Value
Ask clients for ballpark pricing
Underestimate cost structure
Over engineer or use more than 3 axis for pricing
Give discounts that aren't limited in time
Do pilots for free
Use freemium as a vanity metric
Subsidize the wrong side or both side in a two-sided
These are rules, not laws
More business cases
More pricing examples
Pricing methods explained in detail
and Lea(r)n Marketing
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