Understanding the Hidden Costs of Pricing Too Low in Startups
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Chapter 1: The Impact of Pricing on Customer Perception
Every entrepreneur is concerned about the possibility of overcharging for their products. However, should we also be cautious of underpricing?
During a meeting with a venture capitalist, I showcased my product, and his reaction seemed positive. He exclaimed, "This is remarkable! All the companies in my portfolio should consider using it. What's the cost?"
I replied, "It's $50 per month."
His response was, "You mean $50 per user?"
I clarified, "No, it's $50 for the entire company."
His enthusiasm noticeably diminished as he said, "Oh, I'll make sure to mention this to my CEOs."
After our discussion, I reached out to him for introductions to his CEOs, but despite several follow-up emails, he never replied.
Perhaps he was insincere, but I believe the issue lay not with my product but with its pricing.
The Connection Between Pricing and Customer Attraction
Every entrepreneur wishes to avoid setting prices too low. If a customer is willing to pay a certain amount for a product, it’s natural to want to charge more. However, concerns about pricing too high often deter us from doing so. If a product becomes overly expensive, we risk losing potential customers, which is not ideal.
To visualize this concept, consider this relationship graphically: as a product's price rises, the customer base typically shrinks. This is the conventional wisdom, but it assumes rational behavior from consumers.
Unfortunately, people often act irrationally, particularly when it comes to finances. A price that is perceived as too low can be just as alarming as one that is too high.
This scenario mirrors my earlier experience with the venture capitalist. His disinterest was not due to a lack of appreciation for my product; rather, it stemmed from the price being too low. It was significantly below what he expected, which led him to question its true value. Instead of seeing it as an exceptional deal, he thought there must be something I wasn't revealing about the product.
Thus, the VC's reaction exemplifies a more accurate understanding of the pricing curve. The correlation between pricing and customer attraction is nuanced:
- As prices increase, customer numbers decrease (as expected).
- Conversely, if prices drop too low, customer interest can also wane.
Raising Prices to Increase Demand
This relationship is crucial for entrepreneurs to grasp. Throughout my experience advising startups, I rarely encounter companies that are overpricing their offerings. However, I frequently meet founders who undervalue their products.
There are various factors contributing to this trend. Many startups are initiated by younger individuals who may have limited financial resources, leading them to set lower prices. Additionally, early-stage founders often prioritize acquiring a larger customer base over maximizing revenue.
Regardless of the reasons, it's vital for startup founders to recognize that they are more likely to deter customers by pricing too low than by setting prices too high.
To illustrate this point, let’s revisit my own product. Initially priced at $50 per month, we later adjusted it to $2,000 per month—an increase of 40 times while offering essentially the same service. Surprisingly, it was easier to convince customers to pay $2,000 monthly than it had been to sell the $50 option. While this might seem counterintuitive, consumer purchasing decisions often defy logic.
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The first video, "Are You Insecure About Your Price? Try This!" offers practical advice for founders grappling with pricing their products effectively.
The second video, "How to Raise Your Product Prices WITHOUT Losing Sales," provides strategies for increasing your prices while retaining customers.