Warren Buffett, billionaire CEO of Berkshire Hathaway , said – “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.” Businesses are able to derive profit or loss from their products or services on the basis of pricing and this is a given fact. Yet according to Professional Pricing Society, less than 5% of Fortune 500 companies dedicate their resources to developing a pricing strategy.
To put it in a nutshell, lots of businesses and business owners are still grappling with the concept of pricing. These businesses also include startups from various sectors. Many startups have succeeded and failed on the basis of pricing. Prominent examples of multi billion dollar businesses that were startups once include Dropbox, Spotify, Evernote, Netflix and more. All these companies have one thing in common – they offer products to their customers on different pricing segments. Dropbox, Evernote and Spotify offer a freemium account while Netflix has a monthly subscription pricing model. B2C and B2B companies alike pursue different pricing strategies that suits their business model and product offering. However, this topic will be tackled in a different blog.
Behind every successful startup lies a web of investors who analyse every single aspect of the startup including pricing before they decide to invest in a given business. And investors are known to back those startups who are aware of their product and their effectiveness in leveraging the marketing channels to scale the product and revenue. Price is part of the product and not a separate aspect. Depending upon the pricing strategy pursued by the startup for its product, investors are able to determine the potential revenue/profits. This implies that investors are interested in how quickly a startup can gather momentum.
However, pricing alone doesn’t determine a startup’s potential yearly revenue. When investors are evaluating a startup’s pricing strategy, they are more importantly evaluating the revenue/profit potential of the particular startup. A higher price suggests more exclusivity and quality, more features while lower price suggests aggressive market share growth and wider product adoption. So when investors are evaluating the pricing strategy of a startup prior to investment, they are analysing what is called the Total addressable market (TAM) or also called total available market. TAM helps to prioritize investment decisions by serving as a quick metric of the underlying potential of a startup in generating revenue for the product or service. Great product pricing strategy of a startup shows investors that the startup has the potential to scale and tackle the market forces fluidly and robustly.
In summary, a startup looking for investment should give a great deal of thought to its pricing strategy. Pricing plays an important role in receiving funding and a great pricing strategy supported by accurate revenue projections will convince the investor that you understand the market and your potential customers.
Want to learn more about pricing?
Pricing expertise usually comes at high high cost. That’s why with PriceCon we’re aiming at opening the topic to young founders, startups and businesses alike, focussing on delivering high-quality content on innovative pricing strategies and proven, successful models & methods. Pricing is seen as one of the must effective leverages for your business success, master the skills to build both successful and sustainable business models.
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