Author: Omar Mohout – Omar Mohout is an entrepreneur, startup advisor and professor of entrepreneurship at the Antwerp Management School. He is the author of ‘Lean Pricing’, a pricing tutorial for SaaS entrepreneurs.
Two factors have a huge impact on the success of a startup: the business model and the pricing. But unlike your business model, pricing can be changed easily – improving your prices is like finding free money! And yet, so many entrepreneurs are just improvising when it comes to their pricing.
Here are seven pricing secrets that will help your startup capture more value.
Secret #1: 1 percent revenue increase = 11 percent profit increase
First, a number that might surprise you. Research by McKinsey showed that a 1 percent increase in price has the potential to increase your profits by 11 percent. Why? Because a tiny increase in price doesn’t increase your costs: the extra revenue goes almost entirely to your bottom line.
I’ve often noticed that startups sell to fewer customers than they expect, but at twice the price that they expected to be able to charge. So go ahead and try to raise your prices.
Secret #2: define your value through anchoring
Are you clearly explaining what the value is that you bring? If not, fix this first.
Here’s a great example. Numbers for Startups offers 3 price tiers: $29.99, $79.99 $ and – wait for it – $1,850! Here’s how they justify that:
Another case is this SaaS solution for ‘evidence management’. It offers a calculator that shows how many man-hours the solution will save the police department:
The technique of comparing your price to something that your customer is already familiar with is called anchoring.
Successful anchoring is about controlling what other services people will compare you to when making their decision to buy.
Most SaaS companies instinctively anchor their services against other similar providers, but why stop there? Here’s how Sharkboard, a Danish startup, does it: it positions its $649 monthly price as ‘less than an intern’.
Find analogies that work for your customers, and mention them explicitly at the point of conversion.
Secret #3: use decoy pricing
Somewhat related to anchoring is decoy pricing. A decoy is a service that is less attractive than an existing offering.
A classic example is from Dan Ariely’s book ‘Predictably Irrational’. He describes how The Economist offered 3 types of subscriptions:
- Online – $59 per year
- Print – $125 per year
- Print+online – $125 per year
Obviously, the print-only offer makes no sense for the consumer. But in an experiment, Ariely showed that it does make sense for The Economist – the unattractive ‘print only’ offer makes the print+online version look more attractive.
By offering a subscription that no one buys, The Economist manages to sell more expensive packages. Decoys can be great to nudge customers to the package you want to sell – rather than the package the customer wants to buy.
Secret #4: increase the price per user for bigger teams, instead of lowering it
This is a big one. If you are lowering the price per user when customers buy more seats, you’re almost certainly making a mistake. You should increase the price per user.
Microsoft uses this approach, and Asana does it too. In this image you can see that a team of 5 pays $21 ($4,2 per user). But a team of 50 pays $333 ($6,6 per user) – for exactly the same product.
Bigger teams get more value from your SaaS solution, not less – so make sure they pay more per seat.
Secret #5: charge for onboarding
We hear it over and over again: customer success is key to succeeding as a SaaS company. But customer success is expensive, right? Or maybe you’re looking at it wrong.
HubSpot charges a sizable fee for onboarding. When Hubspot introduced this idea, people thought it was a mistake. Now it turns out to be a huge piece of their retention success.
SaaS customers churn when they don’t get the results they paid for, often because they don’t know how to use the product. By charging for onboarding, you can invest in a good onboarding, which results in a higher customer lifetime value.
Secret #6: the power of odd values
There’s a ton of research about using odd value pricing, and it overwhelmingly shows that prices ending in a ‘9’ work better. Gumroad, a platform for selling digital content, did the test. Here is a chart that shows how items sold:
Prices that end in 99 signify value for money. A price of $99 outperforms a price of $104, but it also converts better than $93 – which seems odd. The reason is that consumers have been brainwashed to associate ‘99’ with good value.
Actually, there is only one reason not to use 9 at the end of your price. If you want to position your product or startup as a luxury brand, by all means use even numbers in your prices. Luxury retailers and classy restaurants intentionally use prices ending in ‘0’, because they signal quality and exclusivity.
Secret #7: use smaller fonts in your pricing
Finally, some pricing ninja stuff: the currency signs on your website are probably too large.
The Cornell University of Hotel Administration ran an experiment that showed that using just a number without a currency sign increased sales significantly. Of course, as a startup your customers can come from any corner of the world, so a currency sign is probably important. But you can make it smaller.
A study at Clark University and the University of Connecticut found that consumers perceive prices to be of a better value when the price is written in a small font rather than in large, bold typefaces. Check how Mailchimp is applying this principle:
Fixing this on your website is trivial, and probably more effective than running A/B tests for the action colors on your ‘Try Now’ button.
Whatever you do, remember that pricing is not a ‘set it and forget it’ thing. You should treat pricing as a process. Test pricing points and strategies, try different anchors and value propositions and keep track of the results. Your goal should be to discover which price will allow you to capture the most value.
Usually, that’s a price where your customers will complain that you’re expensive – but still buy.
By Omar Mohout
Omar Mohout is an entrepreneur, startup advisor and professor of entrepreneurship at the Antwerp Management School. He is the author of ‘Lean Pricing’, a pricing tutorial for SaaS entrepreneurs.