8 Common Pricing Mistakes Entrepreneurs Make (Blog 2/3)
Entrepreneurs and Product Managers often spend a lot of time building great products but lose the battle when it comes to pricing. In this blog, I talk about the common mistakes that entrepreneurs make while pricing their products in the hope that you can learn from these mistakes.
Pricing is a deep subject therefore this is a 3-part blog series.
- Blog 1- 10+1 Pricing strategies for products
- Blog 2- 8 Pricing Mistakes Entrepreneurs Make
- Blog 3- How to find the maximum price for your product?
Prefer videos?
I cover all these 3 blogs in this workshop on pricing with PM enthusiasts. If you are only interested to learn about mistakes that PMs make while pricing the products, then tune into the 48th minute of the talk.
Mistake # 1 Let customers decide the price
I have seen many hustlers and budding entrepreneurs use platforms such as patreon.com to let their customers pay for their services. Few go even further to sell services and let customers decide the price.
You cannot outsource such an important decision of product pricing to your customers. It is wrong to think that customers will be able to figure out what should be the right price for your product. Not only is this a bad business strategy, but also your customers do not want to own this task. This is your job. You may end up confusing your customers and they may end up not using your product at all.
Imagine, if I ask you that iPhone 21 is launched. How much would you like to pay for it? What is your answer?
#2 Not being clear about pricing
If your customer lands on your product page and needs to make phone calls to understand pricing, you have already lost a customer. There are entrepreneurs that consider pricing as competitive advantage therefore do not disclose it openly.
As an entrepreneur you are creating too many bottlenecks for your customers to evaluate your product. The attention span of a modern customer during product evaluation is very low therefore you need to provide as much relevant information as possible for your customers to make the choice to use your product & services.
#3 Trying to compete on price
If you are entering into a market that is highly undifferentiated and wish to complete on pricing, then I have a mortgage to pay. You might as well fund it since I am assuming you have deep pockets. You can connect with me on LinkedIn @sandeepchads and I can share the details.
If you wish to complete on price, then it will result in an eye for an eye until the market goes blind. You go down on price, your competition follows, and customer makes merry until both of you run out of business.
Therefore, if my advice makes sense then instead of competing on price, you compete on value and shelve the extra dollars to pay for my mortgage.
#4 Not giving the option to price upgrade
What if you are building a product where people want to use more and are willing to pay more? What if your product has fans who want to pay more? Do they have options?
If you have 10,000 users, there is a possibility that 100 of them are your fans and they love you. If that is the case, then have you given your customers the option to show their gratitude?
You can achieve this by using a “tiered pricing approach” and “value based pricing approach”, so that customers have the option to pay you more as they derive additional value from your product and services. Both were covered in the previous blog. (10+1 Pricing strategies for products)
#5 Pricing way below the reservation price
Reservation price is a hypothetical maximum price that customers are willing to pay for your product. If you price your product way below the customer’s reservation price, customers may start perceiving you as an economy or budget product even though your product quality may be higher.
This mistake often happens when entrepreneurs put the myopic lens of cost plus pricing. And therefore, remain oblivious to market trends, competition, and the value that they are shipping.
Therefore, as an entrepreneur you should analyze the market well and perform enough checks to understand your customer’s reservation price before putting a dollar value to your product.
#6 Your pricing is based on per what?
If you are building a storage solution, then your pricing is based on what? Per user? Per transaction? Per byte of data stored? Per byte of data read? Per byte of data written?
At times per user, per transaction, and per hour units are considered so popular that entrepreneurs fail to think beyond the obvious.
One simple technique is to see the units of your COGS to better understand the units for your revenue.
#7 Pricing == Fill it shut it forget it
Pricing is not a 5 year plan. You need to relook at your pricing strategy every 6 months to 1 year. Your competition, technology, product, market, customer tastes are changing faster than you can imagine. You need to be agile on your product pricing to ensure you are not caught napping.
But remember changing pricing too often also results in a lack of predictability that may adversely impact your product usage and adoption. Therefore, while you may continue to do your analysis you have to maintain a fine balance between knowing the right price and passing that on to your customers.
#8 Price increases for just bottom line impact without understanding the overall impact
Recently, as valuation pressure on organizations have increased and they are asked to show higher margin growth numbers. Therefore, many entrepreneurs have started increasing their prices to show better profitability. This phenomenon is also seen before a start up files for an IPO.
While there is nothing wrong with price increase, however when you increase or decrease your prices, do a complete business value model evaluation.
Understand the overall impact of price rise. Understand if the price increase is still within the reservation price of your customers and partners. Understand how many customers and partners will you loose since price increases can potentially improve margins but it may come at the cost of reduced top line or revenue.
For example, reddit’s API price increase ran their partner Apollo out of business. Reddit’s API pricing results in shocking $20 million-a-year bill for Apollo | Ars Technica
To conclude, it is ok if you do not get your pricing right the first time. The next blog will talk about what techniques you can employ to better evaluate the right price for your product.
I would love to hear your challenges while pricing your products. If you think something else bothers you with pricing then leave a comment and I will do my research to get back to you.
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