#001: Join Me from the Start: The Pricing Myths and Value Creation
Discover Essential Tips on Pricing and Value Creation in Each Issue
The most common pricing question I get from startup founders:
"Claire, what should I charge for my product?"
They often send me their pitch decks or websites along with the question.
Here's the thing - I have no idea what your business does. How do you expect me to tell you a price point to put in your deck or website?
This is the biggest misconception about pricing.
People link pricing with the price point, but the two are completely different.
Because of this misconception, whenever I talk to founders about their pricing problem, they often say, "Oh, I'm still developing the product, we will worry about pricing later."
So, for my first newsletter, let's set the record straight:
Price Point ≠ Pricing
You need to start thinking about your pricing even before you have a product.
The litmus test I like to throw at founders is, "Can you give me a one-liner elevator pitch to tell me what you do?"
I tell them to use this format:
[Your startup] helps [Your target audience] to do [WHAT] so that [Desired outcome for your target audience].
It's easy to ramble on, but not easy to be concise and to the point.
If the founder can do this one-liner well, I can be 95% sure defining a pricing strategy will be relatively easy.
If not, most of the time will actually be spent crafting this one-liner.
Why is it so important?
Let's look at each component:
[Your startup]: This is relatively easy. If you run a solopreneur business, and personal branding is one of your value propositions, you can replace this with "I". Otherwise, it's just the name of your startup.
[Target audience]: This tells me who you are trying to sell your services to. The most common mistakes I see are:
People mixing up the target audience with users (especially in B2B2C business).
Not being precise enough.
A few bad examples:
"Our startup helps companies save money so they can be more profitable."
"Our startup helps individuals manage their time so they can achieve their goals."
"Our startup helps users learn new skills so they can advance in their careers."
These are too vague, too generic. It covers almost everyone on planet earth.
Use as many descriptors as possible to narrow down your target audience.
Good examples include:
"Our startup helps freelance graphic designers find high-paying clients so they can increase their income and build a stable career."
"Our startup helps small retail businesses optimize their inventory management so they can reduce costs and improve their cash flow."
"Our startup helps non-profit organizations enhance their fundraising strategies so they can increase donations and support their causes more effectively.
[WHAT]: This is your solution to your target audience's biggest pain point. List all the pain points your product/service is solving and prioritise them. Focus on the top 1 (or maximum top 3) pain point that customers are willing to spend money on.
According to Tony Robbins, people are motivated to spend their money on four things, and four things only:
Wealth
Health
Sex
Connections
If your product enhances financial security, physical well-being, relationships and intimacy, or social networks and status, then you have something valuable.
Otherwise, rethink what you are building.
[Desired outcome]: Paint a picture for your ICP (Ideal Customer Profile) of what the ideal future state looks like if their biggest pain point is solved.
This serves two purposes:
It helps people imagine vividly what they can expect from using your services.
It gives you a clear idea of what success looks like after you've delivered your product.
Nailing down the one liner is not an easy job. But as I want to talk a bit more on value creation, I'm just going to assume you have the perfect one-liner already.
You know exactly who your ICP is, what their biggest pain point is, and you have a product that can solve it.
Now, let's do some pricing.
You need to answer two questions:
What is the value I am providing?
What is the cost associated with that value creation?
Your pricing will eventually be a point between your cost and your value creation.
Selling below cost doesn't make sense in the long term, and no one will buy your product if you are selling it at a price more than what they perceive as worth.
Estimating value creation is crucial in pricing.
It's an iterative process where you continually fine-tune as your business matures and you get more inputs.
Let's imagine a company called XYZ.
Here's XYZ's one-liner elevator pitch:
XYZ helps mid-sized Australian construction companies manage employee life transitions through a tailored support program, reducing labor hour losses by improving attrition rates and reducing absenteeism driven by mental health and low engagement.
So the value your product creates here is reduced labor hour loss. We need to turn this value into a number by focusing on the two areas you've claimed to improve:
Improved attrition
Improved absenteeism
We introduce the concepts of DN (Do Nothing) and DS (Do Something). DN & DS will be your best friends throughout your Pricing journey.
Improved attrition:
DN: 14% voluntary attrition rate in the Australian construction industry, 100% of the annual salary as the average replacement cost, $70k average annual salary. We assume people leave on an evenly distributed basis throughout the year.
Attrition costs a company with 100 employees $490k (14% attrition rate * 100 employees * 70k annual salary * 50% assume on average people leave half way through the year).
DS: Assume a 50% improvement in attrition.
The value creation here is around $250k (50% of $490k).
Improved absenteeism:
DN: 16.2 weeks average duration of mental health leave, 10% of employees take mental health-related leave annually, $1,346 average cost per week assuming 70k annual salary. Again assuming event happens evenly thorughout the year.
Absenteeism costs the company $109k (10% of 100 employees 16.2 weeks $1,346 per week * 50%).
DS: Assume a 50% reduction in mental health leave.
The value creation here is around $50k.
So, the total value creation is $300k.
I hope you've noticed one thing here:
I am NOT trying to be precise. The goal is to get a ball park figure to start with.
What's important is to get you become familiar with proxies you could consider to turn something intangible into something tangible.
The next step is to fine-tune that number over time. It's okay if it takes months or years to get better at it.
Estimating costs is usually straightforward. Let's assume it costs you $50k to provide the service.
Therefore, your pricing range is between $50k to $300k.
That's enough numbers for now. We'll continue in another newsletter on where to go from here.
Quick re-cap, and if you are keen to get your hands dirty, two things you could do:
Review your one-liner pitch and refine it based on the guidelines above.
Think about the value your product creates and start estimating it.
Drop me an e-mail if you have any questions.
Share this newsletter with whoever you think could benefit from reading it.
This is the very first newsletter I've created. I hope you find value in it.
Again, I'm very glad to have you all on this journey with me, and will appreciate if you could help me to spread the words.
Until next week!
Cheers,
Claire
At what point in your product development journey you've brought in Pricing support? Share your experience by leaving a comment below.
Thanks for creating these articles. I’ve really enjoyed them!