Why Startups Lose Money With Their Initial Pricing
Don’t take wild guesses. Instead, focus on build, market, growth, and scale.
Have you ever wondered how startups get into that awful spiral of hemorrhaging cash by selling their product for less than it costs to make it?
It’s on purpose. And there’s a good reason for it. But it all starts with their initial approach to pricing.
The science of setting a price for a product is not only sneaky difficult, it’s also surprisingly emotional. In a 20+ year career as an entrepreneur, I’ve gotten into straight-up confrontations with smart people over setting the price of a new product.
So not only can I impart to you what I did wrong, but I can tell you why I did it wrong.
Why pricing a product is so difficult
In order to get pricing less wrong, let’s first understand why it’s never right.
Normally, when you have two equal and opposing forces, there’s going to be tension and difficulty that will eventually result in confrontation. Pricing is extra thorny because there are usually three sides to the pricing equation:
Your sales team will tell you that there is absolutely no way they can sell your full-featured product to your intended market for more than $X. Your customers, they’ll rightfully defend, only have so much budget, and frankly, they’re just not that interested in your product.
Your build team — engineering, manufacturing, service talent, etc. — will tell you that there is positively no way that they can deliver your full-featured product to your intended market for less than $Y. Your customers, they’ll rightfully declare, are too sophisticated to accept less than an exceptional offering, and honestly, your budget for product development just isn’t where it needs to be.
And you — the owner, the inventor, the visionary — there’s no chance in hell you’re selling your baby for less than $Z. Just because.
Something’s got to give here. Actually, all three of these forces have to give. Oh, and also satisfy the customer’s demand and budget as well.