Kevin Hale - Startup Pricing 101

this was a highly requested talk from last year or lots of people had questions about pricing or really confused it's actually was well requested both at YC itself that's a very very popular workshop that we run and so we're gonna go over a lot of basic fundamentals for pricing that hopefully will just help you understand how to approach your pricing and monetization from first principles and then you help you help yourselves same thing with the landing page lock so we're gonna go over first principles for pricing we're gonna go over why is pricing particularly hard for startups for people making innovative products and new markets like why is it extra difficult how do you do price optimisation like how do you actually do it what does that actually look like and just kind of demystify that whole process when we look at the challenges of pricing you start recognizing why certain types of customer segments that you're going after are difficult like SMB and we'll talk a little bit about that we're gonna talk about how pricing affects your acquisition strategy it changes what you can do and what you cannot do and it's extremely important because a lot of companies get caught up doing the wrong position strategy or wasting too much money use the price is incorrect and then I'm gonna give you some rules of thumbs some pricing tricks just to help make it a lot easier when you're encountering different pricing problems I call them pricing trick sprinkles okay there are three lovers you can pull to improve growth so in the last talk I talked about conversion rate and churn but monetization is actually the Big Dawg it's the one that I really like now there was a survey done with over 500 SAS companies and they talked about sort of like amount of effort that they put into each one of these strategies and the returns that they got as a result of it now acquisition is really fun and exciting it's the one that everyone kind of understands simply it's like I get more customers I get more logos gives me more growth retention of course is about keeping customers and zatia is about getting more money per customer now if you increase just your efforts or resources by one percent your work on acquisition usually get a return of about three point three two percent in retention it's about six point seven and when you're optimizing pricing that gives you your biggest bang for your buck in terms of impact on your business yet and it's the one that is most neglected and I think it's the one that everyone is so afraid to touch because they're so scared that if they get the pricing wrong that they will lose all their customers now the first principles the basic idea about pricing the thing the concept that really opened up in my head how to think about pricing how to understand the problems that people are facing and why startups get it wrong is to use a concept called the pricing thermometer and so you have to understand that when you price something there's actually like two other factors at play and so there's a cost there's the price and then there's the value and the interplay of in relationship between these items affects how growth happens inside of your company now the gap between price and cost that is your margin that is your incentive to sell and so the bigger that gap is the more you are driven to want to push your product to your customers to have your sales people etc this gap here between price and value is incentive to buy and the larger that gap is the easier it is to have your customers to want to sign up or views your product now to figure out price there's really two ways to go about it you either start with the cost if you know what it is and you figure out where your price is based off of that that is called cost plus the other way to do it is figure out what is the value of your company or product or service and then you figure out your price from that and that is called value-based pricing in startups and almost pretty consistently across all businesses everyone will tell you you should strive for value-based pricing it allows you to charge a whole lot more it allows you to manipulate this incentive to buy the problem is because people do not understand their relationships or even understand what are their costs and what are the value that their customer is going to think about their product they put their price in a kind of arbitrary place and they don't know what are the forces at play that drives it and it results in four different types of mistakes the first one is startups will price their products too low basically you consistently under charge is the number one piece of advice we give through most startups to fix their pricing and I'll talk a little bit about why most companies fall into that trap you underestimate your costs and the result is you have a problem where your margins aren't enough to cover sort of acquisition you don't understand your value you don't understand how your company thinks about the problem that you're solving for them or how they value it and either they don't understand your value or you don't know how to convince them of the value that you think you offer and as a result you can't get the price that you want and lastly you focus on the wrong customers that you think man man if I built a better product and I charge half the competition I win the thing is that almost never happens and the reason is because you as a start-up you as working on something to create a new market are working on innovative products you are focused on the wrong customers they are not the mainstream people who are going to look at the price and make most of the determination based off of that so this is the sales and profit over a product's life from an Shinto demise that's what it's called all you need to know is that these are five different stages of a company and this is what sales might look like over different stages and what profits might look like over those different stages you who are in start-up school you who are getting seed funding your are in the first two stages product development stage introduction you are not in the growth phase and the thing to keep in mind is that the customers in the first two stages the ones that you're going after they don't look like mainstream customers that you find in growth and maturity stages they're not mature customers they're early adopters and thing to know about early adopters is you kind of don't really get a lot of momentum and growth until you get past the first two to five percent of potential buyers of your market these people in that two to five percent they're called early adopters and the thing that drives them it's very different from mainstream people so one there's a couple things to keep in mind about pricing innovative products what you are trying to do fundamentally is require users the change to their pattern to stop doing it the old shity spreadsheet way and do it in the new better your way and getting someone to change their pattern is actually difficult right especially if they're a mature person partly because the average user lacks information needed and the trust in you or whatever it is that you're making to make that change to take that risk you are entrepreneurs you're comfortable taking risks your customers are not entrepreneurs for the most part they're probably less comfortable taking risks and so in the beginning you're going after people who are willing to take a risk and those are early adopters those are people who care about benefits above all else that the highest value to them is beating their competition doing something much better and taking a chance that something new will give them that edge over anybody else those early adopters therefore are not price sensitive if anything if you've built a better product and you charge less it looks like you have reputation risk it's like why is it too good to be true what is the catch and what will end up happening is it makes it much longer to get to not understand this is basically all price optimization this is those complicated way that you can try to show price optimization this is a demand yield curve and when you have on this side is different prices and on this side you have sales unit sales and basically what you are trying to figure out when you're optimizing the price that you're charging your customers is like basically what is the perfect balance between how much I charge and how much sales volume I get and then your price optimization is basically that try different prices and then see what the effect is when I have my companies optimize their prices they just use a very simple table you don't need to try to figure that weird ass graph basically you want to have a column that says these are the prices I'm gonna try and then what is the result in conversion rate what is the result in sales volume and then how much revenue did I generate that's all it is and so let's say I have prices at these different price points and I get these different conversion rates and I get this sales volume I should immediately be able to see who the winner is here we go now the one thing to keep in mind once we have figured out something like this what a simple product is that these areas at lower prices if you can afford them in terms of your margin or actually lost opportunities and what you want to understand about these are these are what you're going to see if you offer discount pricing or offer tiered pricing at different price points another exercise I like to go with companies when dealing with pricing is how them understand is like are you in a danger zone and so what I usually do with my companies that I help have them sort of calculate what would their business look like or what does it gonna look like to be a billion dollar company and usually the rule of thumb there is to be doing a hundred million dollars a year in sales and revenue and so that basically is like what at your price that you give how many customers do you need to have to make a hundred million dollars in that year so let's have a bunch of different price points then we know okay great I need these number of customers in order to make this formula work you understand what that looks like at a hundred dollar price point with a potential about million users right this is consumers that's what that consumer space looks like and you know what this down here looks like $100,000 here we call this enterprise this area here is the part that a lot of companies are in and really really struggle they're on the struggle bus and it tends to be SMB these are people who kind of treat their money like consumers right but they kind of look like they might be an enterprise and the reason why this is such a danger zone is because it will tend to fit in the wrong place on my next diagram so let's imagine that this vertical axis represents a price you can charge either high price or a low price for your product and this represents complexity of your sales process low complexity to high complexity if you are having a product that is two thousand dollars or less and is basically self-serve then you have something in this quadrant here and this affects completely what you can do in terms of what drives your business what you can spend on to get that sort of growth that price point here at $2,000 it needs to be have almost all marketing be inbound you can't spend a lot of money outbound or ads etc your support has to be completely self-serve or very very minimal you have no sales team at this price point you can't afford it right but conversions can happen on the same day must be in a self-serve model transactional so between two and ten thousand dollars when you're able to charge this you're able to have a few new toys at your sleeves and so marketing now can be focused on generating qualified leads your customer support can now offer like SL A's or you can start paying for training that people get on boarded and for sales you can't hire a dedicated salesperson but maybe you can have an inside sales rep to sell within companies are within your customers you could maybe have an SDR and you can maybe have someone dedicated to giving product demos sales cycle here should not be longer than one to three months enterprise it's over twenty five thousand dollars now for marketing you can start spending things on branding on building up trust with customers your support is very very high touched that you can afford you can do phone support you can have a customer success person dedicated to the client and for sales you're going to start thinking about sales managers dividing stuff into territories and having sales engineers that participate in terms of conversion and the sales calls these will have a sales cycle about six to twelve months this is the garbage zone right and you know if you're potentially in this and this is the big wake-up call for you if it's taking you months and months and months to close someone but you're not making a lot of money to cover it you have a process where your acquisition costs are just too high for you to be sustainable and you have to get yourself out of that problem all of your work should be towards increasing the perceived value of your product or service I'm going to end on a good rule of thumb so if you are starting with some kind of price but you don't know how to sort of optimize it or figure it out then here's a good place to get going the first thing is I like to have things where the value is 10x the price of whatever it is I'm charging and I want to have it so that the value is easily understood to be 10x so for example if I charge for a product that is $10 then it should be in terms of perceived value by my customer that it's worth $100 to them if they do not immediately understand the 10x value of the price it's gonna be hard to get them to move their incentive the buy might be too low once you have any kind of price and this is particularly important for people are doing b2b or enterprise sale you should start practicing raising prices and I like to just start by raising prices by 5% if you feel really confident jump it up by bigger numbers if you want but this is a pretty safe way to do it so that you can feel comfortable with it and you want to keep raising prices until you're losing 20% of your customers that's about a good balance to have in terms of understanding that like I have a good price here I'm losing 20% of my deals it's not too high it's not too low in summary for pricing pricing gives the most bang for your buck you should work on pricing if you've never touched the pricing of your product then you're losing out on lots of potential growth understand the variables do you really understand your cost do you understand why you've plate the price where it is and do you understand the value when you go into a sales meeting or call do you talk to people and you basically say it's like I know exactly what this is going to be worth to you so when I tell you what the price is going to be you're going to be like damn that's totally worth it go after early adopters remember as a startup that is who you're going after so when you are talking to customers and they are taking a really long time to make a decision or they're wanting to have a lot more proof that other people are using it are not talking to an early adopter you're wasting a lot of time on non-believers go after them first don't take it personally when these people who are much more mature aren't ready for your products they were never going to be your job is to get through that first two to five percent of the market those early adopters care more about benefits than price so don't under your products when you have something that is of value and easily understood to have value get organized when you're doing proper price optimisation it's really really easy don't over complicate things figure out a bunch of different price points you want to check understand sales volume conversion rate and the revenue that's involved and that will help you make the best pricing decision your price will determine your acquisition strategy if you realize that your sales cycle or all the things that you're spending on is way too much for the amount of money that you're charging you either need to increase the price or completely reduce your acquisition strategy costs use the 10 520 rule set a price that is 10x that is a tenth of the value increase prices by five percent until you are losing twenty percent of the deals thank you very much guys [Applause] you you

Channel: Y Combinator

Views: 154,928

Keywords: YC, Y Combinator, Startup School

Id: jwXlo9gy_k4

Length: 19min 32sec (1172 seconds)

Published: Fri Sep 06 2019