Tag Archives: Metrics

A pricing strategy is arguably the most important factor you need to consider when for your business. Go too high, and people will be put off from buying your product or service. Go too low, and potential customers will question the quality. So how do you find the right pricing strategy? That’s the purpose of this guide, which looks at the different types of pricing strategies for your business.

 

  • Price skimming
  • Market penetration pricing
  • Premium pricing
  • Economy pricing
  • Value-based pricing
  • Dynamic pricing
  • Bundle pricing

 

Different pricing strategies

Price skimming

Price skimming is popular with many startups. It involves charging the highest initial price a customer is willing to pay and then lowering the amount over time. Once the demand for the first customer is satisfied and competition enters the market, the company lowers the price to attract more price-sensitive customers. Price skimming can be particularly successful when there isn’t much competition for a product or service.  

Market penetration pricing

Market penetration pricing is almost the opposite of price skimming. It sees a company delivering a lower price during its initial offering, with the aim of attracting customers to its new product or service. The lower price is designed to help the new product penetrate the market and attract customers away from competitors. Market penetration pricing only usually works in the interim, aiming to raise awareness with a large number of customers. 

Premium pricing

If a business creates a high-quality product or service aimed at high-income individuals, it might try premium pricing. This pricing strategy involves developing a product that people deem as high value. Therefore, the target market is anyone operating in the luxury or high-end lifestyle markets. 

Economy pricing

With economy pricing, the aim involves targeting customers who want to save money when purchasing goods or services. Stores like Asda use economy pricing models to appeal to a range of customers looking for discounts and price-saving deals. Unlike premium pricing, economy tends to be for more functional products and services aimed at a specific target market. 

Bundle pricing

Bundle pricing can work if you’re selling multiple products. You take them and bundle everything together, selling at a lower price than if items were charged individually. Discounts can create a sense of demand, allowing companies to sell products and services they previously struggled to shift. When done right, the result is a greater volume in sales. 

Dynamic pricing

Flexibility can be key for many businesses, and dynamic pricing is often used to establish flexible market prices for products and services. It considers variables, such as the balance between supply and demand, as well as seasonality and competitive strategy. As a result, companies can adapt to the market, be more agile and offer a more competitive service to customers. 

Choosing the right pricing strategy

With so many pricing strategy options, businesses have to decide the best way to market their products and services. By taking a good look at your offering and comparing it to other competitors, you can settle on a pricing strategy designed to help your company progress and find the sweet spot for the cost of your products and services. 

Growth or profit? For B2B tech startups, it’s the million-dollar question. 

Both of these outcomes are highly valuable for businesses. And most founders strive to position their businesses for both maximum growth and sustained profitability. Unfortunately, we know that it is incredibly difficult to attain both at the same time. In the end, it comes down to understanding the difference between the two and making an educated decision on when to shift your attention and resources to each one. 

So, what is the optimal ratio between the two?

Exploring the rules of growth and profitability 

Completing some online research will highlight that there are numerous rules of thumb out there for assessing whether your B2B tech startup has the right growth-profit balance. The now famous “Rule of 40” suggests that a successful SaaS startup’s growth rate plus profit should add up to 40%. Which means if you’re growing at 60% per quarter, you can afford to lose 20%. 

The basic idea is that early stage startups should aim for high growth, prioritising unit or cohort profitability, not overall company profitability as the company invests in product and service development and scalability.

Growth 

There’s organic growth and growth by acquisition or partnership. Usually for a B2B tech startup, organic growth will be the priority. That can include increasing the workforce, increasing the customer base and increasing the volume of sales. 

However, with this comes increased risks with additional obligations, and with fast growth and rapid expansion, businesses can run into problems with maintaining quality.

Research shows that 93% of B2B tech companies fail to reach Series A funding.

If you want to run a successful startup that will last, you have to learn how to measure startup growth. 

In light of recent economic and market conditions, most notably the implosion of WeWork, growth isn’t enough to attract investors anymore. 

Profitability 

Profits are important to every business, and it’s no surprise that most entrepreneurs seek to become profitable quickly. Unfortunately, only two in five startups are profitable, and other startups will either break even (1 in 3) or continue to lose money.

Sometimes, achieving true profitability comes at the expense of growth. Instead of reinvesting profits into sales, marketing and employees, founders use profits to build the bottom line and net cash. 

For a new startup, one of the greatest advantages to focusing on profitability is the ability to maintain financial stability without relying on outside investment. 

Finding the right strategy to balance growth and profitability 

Startup founders need to strike a balance between growth and profitability in order to secure investment and sustainably grow their business. 

Some of the key ways to strike the right balance include: 

Cash flow – as a general rule of thumb, it is recommended that you should have enough cash saved up to cover a minimum of 6 months’ worth of expenses.

Cash conversion cycle – analyse the time (days) it takes from e-signature to invoice sent and to the invoice being paid, decreasing this time will bring new much needed cash into your business and fuel your growth.

Establish targets – set a minimum profit level and allow for growth-focused investments with any profits that exceed that target.

Market fit – it’s important to generate revenue during the early stages, in order to verify that customers will pay for your product.

Cost-to-serve equation – this analysis will pinpoint exactly how profitable a particular customer will be and which ones may actually generate losses for the business. Then you can establish the value of that customer and weigh that against the risks. 

Customer referrals – asking your existing customer base for recommendations, means new customers can be secured with minimal investment, even if referral fees are due, it’s when you receive the revenue. A strategy like this will help to grow the business and generate profits simultaneously. 

All sized companies need to be agile and learn when to shift their focus between growth and profitability at different stages of the life cycle. At Sales for Startups we work with Pre-Seed to Series A startups to create comprehensive agile strategies to support overall goals. 

To find out more download our Winning Sales Strategy or book a consultation call with our CEO & Founder James Ker-Reid.