How to Set Price: 10 steps that will reveal the right price for your new offering
As we help firms introduce new, breakthrough services and experiences, there comes a moment that can feel like the first day of school: Pricing.
No matter how much preparation has come before, the venture team can suddenly feel uncertain, anxious, and wracked with doubt.
Before simply setting a price for a new offering, most venture teams have taken great care to study the user context and to define and validate the surrounding business model. The typical elements include:
- User journey/job-to-be-done/pain- point
- User perceived value of the offering
- Right to play
- Supply chain
- Demand chain/channel/customer acquisition
- Service delivery model
- Cost structure
- Revenue requirements (we recommend Discovery-Driven Planning for this)
- Year 1 go- to -market plan
- Revenue model (bundle, price, frequency, revenue share)
- On-ramp (how we lower the hurdle for tryout)
As this list shows, Price - that magic element that excites and frightens us - serves as an important cog within a larger machine. You don’t set the price in isolation. You don’t choose price using a mathematical model. And you certainly don’t announce a price and cross your fingers.
Instead, ventures can view Price like other attributes that they design for with input from the market. Here is a step-wise checklist for how successful ventures can step down to price, rather than making a risky leap. You can think of each step as an assumption that needs to be tested and validated with the market.
Step 1, The venture team believes target users will perceive a problem and will perceive value in our solution.
- We have observed the problem directly, and based the design of our solution on empathy with the users
Step 2, Target users do perceive a problem and see value in our solution when we show it to them.
- Users tell us, “I like that.”
Step 3, Target users validate ordinal value.
- Users tell us, “I like that more than X, but less than Y.”
Step 4, Target users indicate cardinal value (they are aware of their current expenditures of money and time regarding this problem).
- Users tell us, “I see it as saving me X time and Y dollars.”
Step 5, Target users are willing to have a relationship with our firm/agent regarding this offering (i.e., right to play).
- Users tell us, “Your firm/agent is a credible provider of a solution.”
Step 6, Target users believe it is equitable to pay, based on precedents/analogies.
Users tell us, “I would expect to pay for this, similar to how I pay for Z.”
Step 7, Target users have a reference group of expenditures in mind when considering your solution.
- Users tell us, “I spend about X dollars for category Y, and that is way less important to me.”
Step 8, Payment timing makes sense to them.
- Users tell us, “I see, I don’t pay until/unless I use it.”
- Users tell us, “I see, since you provide it monthly, I pay a monthly subscription.”
Step 9, Price feels fair compared to (a) existing workarounds and (b) alternative solutions.
- Users tell us, “That amount sounds worth it, if it works.”
Step 10, Early adopter target users feel their risk is being recognized and offset (i.e., an on-ramp).
- Users tell us, “It makes it easier that you’re willing to bear some of the risk since this is relatively unproven.”
The actual Price does not come into play until Step 9 of 10. By then, the venture has had ample signals (Steps 1 thru 8) to help bracket the price. Each one occurs within a rich context of the surrounding offering, business model and venture strategy.
By following these steps, Price feels less like a decision, and more like a natural output of the business design and validation process. That’s when the pPrice is rRight.
Of course, you’ll still feel those first-day-of-school butterflies. But it’s because you care so much about your venture, not because you aren’t prepared. Don’t worry; the Price is right- enough. In almost no time your venture will be post-revenue! Now you can turn your attention to getting traction in the market.