Maybe You're Not Charging Enough
Five Words Startups Need to Hear Over and Over
An early-stage founder gave me feedback recently that this piece about customer segmentation helped her think about raising her prices.
She knows certain customers would pay more (they’ve told her they would!) and that she should capture that value. Still, she has hesitations:
“But our press release says…”
“But people will be pissed!”
“But what if we have to lower them?”
“But our competitors aren't charging as much as we do...”
“How do we prioritize?”
I get it. It’s uncomfortable to raise prices. Still, in my experience, startups almost always can (and should) increase their prices.
Either way, you’re not charging enough
A common trope in pricing is ‘if your prospect says yes to the first price you ask for, you’re not charging enough.’
If you’ve ever negotiated and put out the first ask, you know what I’m talking about. There’s nothing more useful (and painful) than the visceral, immediate feedback you get when someone says yes too quickly. There’s only one appropriate response.
Leaving money on the table is painful, but hearing yes is obviously the better outcome. Hear enough fast yeses and you will increase your prices.
Startups don’t often get this feedback. It’s rare for people to say a quick yes to a startup. In my experience, startups face the opposite problem: prospects are saying no because they’re not being charged enough.
We see this all the time in enterprise sales. Desperate to close their first customers, startups discount to oblivion or offer free or almost free pilot programs. Engaged prospects pass without negotiating, and companies are left scratching their heads.
“It’s basically free! What’s going on?”
In many cases, the buyer is questioning the quality of the product or service because it’s priced too low. They’re thinking:
They can’t really offer all this value at this low price
They haven’t invested the resources to successfully deliver
The product won’t be worth the time-consuming and costly onboarding process
Our team will take on too much of the work
There won’t be enough customer support
Wait a minute. If customers say yes without a fight, we’re not charging enough. If they say no without a fight, we’re also not charging enough?
That’s right. For early-stage startups, the default assumption should be that either way, you’re not charging enough.
Dare to be right about your value
My friend Dylan recently told me about a business he’s an investor in. The team purchased a real estate software company that had a small but loyal customer base and almost no growth. The long-term plan is to improve the sales motion and invest in product expansion, but the first thing they did was double the price.
Previously, property owners were paying $99/mo. for the software. Sales were hard. Today, they’re charging owners $0.65/door/mo., which ends up being at least a 2x greater price. Yes, some of this comes from better aligning their pricing model to their value creation. They also jump-started growth by simply charging more.
The concept of charging more applies to products you have and also to products you don’t. Remember when Tesla charged $1,000 to reserve a spot in line for the Model 3? Reports said they had at least 325,000 deposits for those cars. Tesla made $325 million by monetizing a waiting list.
Startups can do the same.
In April, one of my portfolio companies had a team-wide conversation about their annual budget. This was a pre-launch company with ambitious goals of hitting 1,100+ paying customers by year-end and team members were asked about what concerns them the most about the plan.
When someone mentioned that hitting their first-month goal of 10 paying customers worried them the most, a founder jumped in immediately. She said that given her conversations with potential early customers, she’d be shocked if they didn’t hit it.
So we posed a question: Why wait until launch to start charging these early adopters? Could we test their commitment and start charging them right now?
By Monday the following week, the ability to take payment was in place and they started charging people to be on the waitlist. They hit their August goal in June, and they haven’t looked back.
Increase prices, increase profits
The Harvard Business Review estimated (in a fairly dated analysis) that relative to other levers, increasing price has by far the greatest impact on operating profit.
It makes sense: if you increase prices and sales don’t drop, every additional dollar flows straight through to gross margin. Of course, sales can drop. That breakeven analysis isn’t in scope for this post, but perhaps I’ll run through it for a future post.
Anyone who has worked in sales appreciates that you don’t truly know a prospect’s purchase intent until you ask for the sale. Similarly, you don’t truly know if people are willing to pay more for your product unless you try to charge them more.
Given the impact prices can have on profits, isn’t it worth it to find out?
My reductive attitude about increasing prices is missing nuance and I’m sure raising prices like an auctioneer can lead to harmful unintended consequences.
What are those consequences?
How have companies gone too far?
Whether you have thoughts on this or anything else pricing related, I’d love to hear from you!
Thanks to Kerry, Nicole, Nina, Dylan, David, and Katie for your help on this.
Nick, excellent perspective, as usual!