One of the most faced startup problems has been charging value for the services they offer. It’s not that choosing a price is challenging. The challenge is determining how much your prospective customers are willing to pay for your services. The only way to know if your customers are willing to pay for your pricing rate is by testing it out and listening to your customers.
The fear of charging either less of what value is given or more than the value offered can scare away customers or retain them; leaving startups often penniless. The difficulty here with startup entrepreneurs is that, they get lost in calculating the value for what, to who the service is offered and other things to be factored into the pricing rate. I bet most startups do not even have to do any calculations to determine their pricing. They just imagine how much it should cost based on what was spent in producing the services or products which is totally wrong.
If you are just starting a business or penetrating an existing market as a startup, you are probably wondering how to price your services or why customers do ‘frown’ or complain about your prices, depending on the situation.
When you are running a business, you incur some direct and indirect costs. You incur costs for rent, salaries, insurance, legal fees, benefits and tax. Determining your price point includes all of these costs. What ever price is determined or set, whether a flat fee or an hourly rate, there should be enough cash (profits) to pay these bills, to manage the business and a ‘save away’ for future growth.
Determining what goes into your rate of prices for the services you offer, many factors such as reputation, size, experience among others play a major role upon which customers perceives your value. If you have done a ‘thumbs up’ job with distinguishing your startup business from the rest, you might be able to charge more for your services.
To determine what to charge for what, you should consider some of the followings below.
1. Target Market
Target market is important. How big do you want your target market? Few hundreds, thousands or millions?
How easily can you access and reach these number of customers?
Every business wishes to have a huge target market. The bigger the target, the bigger the profits. If the services or products you are offering has a mass appeal, then you can offer a low and competitive price which should not exceed your revenue costs. This strategy allows you to take over the market with a cheap product or service which consumers would purchase without much considerations.
If the product or services have a niche market, your price rate would have to be higher. The strategy of offering a cheaper price mostly are effective to impel growth at an early stage of your business. This if not well managed, can actually lead to a market saturation point but not sustain growth and profit margin to cover the costs of business.
How big is your target market? A very important question to ask yourself.
2. Experience and Expertise
How do startups rate their services based on these? Experience and expertise is not achieved in a day. So how do these really influence pricing rate? You realize that, some corporate businesses, do not have to struggle hard for price rates to go down well with their customers because, over the years, they have proved consistencies.
Most startup business owners have earned some working experiences and expertise before starting up their own businesses. Including this factor into your pricing would give your customers the impression that you are worth more. Don’t forget to include the value for your experience and expertise. Whether much acquired or not.
3. Competition / Competitors
How much are your competitors charging? Are their customers willing to pay for the value they are charging?
Use your competitors market pricing as a benchmark to your rate. Competition also helps sets good pricing for services. Some times, the trick is not all about how much your competitors charge for their services or products or whether their customers are willing to pay. The trick is how best customers (prospects) can relate to your services or products, how best it will serve their needs and how consistent your story is conveyed. They may be willing to pay even much more for your value.
4. Cost per Acquisition
Is cost per acquisition a factor to consider? Yes!
A point which most startups do not or might not consider in determining their pricing rate. How much is it going to cost you to acquire these customers?
Customers do not fall out of the blues. You acquire them. Acquisition comes with a cost which must be factored into price determination as well as customer retention. It is even much more costlier in retaining than acquisition.
The most important question to ask in relation with cost per acquisition is how long will your customers keep paying for the value you determine? This is called the Life time value (LTV).
Acquiring new customers as well as retaining them incurs costs depending on the channel or medium of acquisition to attract customers.
Today, there are many mediums to attract prospects which may be less affordable for the startup to consider. The emphasis is; attracting prospects (customers), is a must cost to factor into determining your price for the services or products you are offering.
5. Value perception
Is your product or service worth money to your customers? Which features of the services or products you are offering worth the money?
Should your pricing be charged according to usage or user?
Usage and User are two different prepositions in value perception.
How do you determine value perception?
Determine a multiple plan with a varying factor which allows a feature upgrade with value.
6. Cost to offer service
There is also a cost to providing the service you provide. To much costs to bear ? Running a successful business runs simultaneously with with a good costs (investments)
At the introduction of this topic, I noted that every cost you incur (inputs) directly or indirectly are all factors to consider in determining your services rate.
The basics is that, the more your customers base grows, the more resources or costs you will need to keep the services running.
How much money do you need to earn for this business to be feasible?
Ascertaining your daily, weekly or monthly expenses you have and how those expenses will increase each time you acquire a new customer is very important before deciding a price. You need to ensure your service can charge enough to cover your basic expenses.
You don’t have to charge less for what has more value. The customer is always right- a tiny truth you should always remember; base on what you offer them, how best it resonates with them, they would offer to pay what it’s worth to them. Do not forget to also brand or package well what you are offering.