The Importance of Pricing Your Services Even in the Early Stages of Your Startup

Pricing for Early Stage Startups.

For most novice and even seasoned entrepreneurs, one of the most challenging and crucial decisions they face is the one of pricing their product/services.

This decision becomes even more crucial for those entrepreneurs just starting their entrepreneurial journeys, as they may be tempted to offer your service for free to attract customers or gain traction.

Doing so may hinder your business in the medium to long run, it may make sense to offer the service for free due to strategic reasons however, make sure that the “free” offer will lapse in time.

Yes, it’s hard to strik the right balance between showcasing your value to a new customer and securing that service/product payment that:

  • Gives Value to your Offering
  • Confirms Product Market Fit
  • Assures Sustainable Startup Growth

Why Pricing is Important

Pricing your product/service is extremely important and should not be taken lightly. It demonstrates how you value your brand, how you position your offering in relation to the market and target customers.

Let’s take the opportunity and elaborate in more detail some of the reasons founders should consider adequately pricing their offering right from the get-go.

Value Establishment –Pricing well your offering sends out a clear message that you are providing value and this value comes at a cost. It helps build brand reputation but most importantly it attracts the right customer.

The customer willing to pay for your offering is the customer that ultimately understands your value proposition and values what your offer does to eliminate their pains.

Take Apple as an example, Apple is known for its premium pricing strategy, Apple products are often priced higher than competitors and yet their customer base keeps growing due to the intrinsic feeling Apple products gives to their customers.

In other words Apple’s pricing translates into high quality and exclusive products, desired by a strong and loyal customer base.

Revenue Generation – The fundamental reason for foundrs to charge for services is without doubt to generate revenue. This revenue makes the business profitable which in turn translates into growth and scale.

Netflix initially offered a free trial of their platform then quickly moved to a subscription model. This approche secured recurring revenue streams that was crucial for Netflix growth and cash to fund content creation.

Market Positioning –We have touched slightly on market positioning as one of the main factors to price your offering right from the get-go. The strategy your startup adopts in terms of pricing will position your startup in the market.

For example if you price your offering with a high, this positions your offering as a high quality exclusive offering.

Tesla adopted a premium pricing strategy which placed Tesla as premium brand in the electric vehicle market. By pricing its vehicles with such a high pricing tag in comparison to competitors  Tesla positions itself as a leader in innovation and luxury.

Attaching a low price tag to your offering may appeal to price conscious customers and in most cases offering your service for free will in some cases devalue your offering, needless to say that this is all within context.

In the short run drastically reducing the price of your service or offering it for free might be a sound Growth Hacking strategy. As doing so will attract users however, in the long run is not sustainable as the business needs to generate liquidity which is crucial for running and scaling operations.

When Should Your Startup Offer Services for Free

Ideally you should be charging for your services, however, there are several reasons that make entrepreneurs especially the underrepresented to strategically offer their services for free.

Beta Testing –You may want to offer your services for free to all users or a selected group of users. This will help your offering to get visibility, gather valuable feedback from users and reiterate on the fly.

Users know that “Beta” means that your service is not yet where you want it to  be therefore, it helps to reduce the pressure from any paying users.

Google did this very well with Gmail, Gmail was initially launched in a beta version available by invitation only.

This strategy allowed Google to refine the service based on user feedback before the global release.

User Base Growing – Many startups offer their services for free with the intention to grow their user base especially those who rely on community/network engines.

Dropbox growth hacking strategy was to initially offer free storage space to attract users. This strategy helped build a large user base, many of whom later upgraded to paid plans for additional storage.

Freemium Model – Business models can also define whether or not you will be providing some basic services of a startup offering for free, with the intention to attract and give visibility to startup offering and charge for premium features.

This is the most popular strategy, take Spotify as an example, Spotify initially offered a free ad-supported version to attract users in a competitive market.

This approach allowed it to gain significant market share quickly and convert free users to premium subscribers.

Strategic Partnerships – Startups especially those led by unrepresented founders can offer their services for free to partners and Key Opinion Leaders KOL’s, with the intention to build a network and gain exposure and credibility.

While it may be tempting for startups to offer their services for free as an effective strategy in certain scenarios, this practice should be approached pragmatically and with a clear plan.

Startups first and foremost need to create a sustainable business model, and this often requires setting a price for thor services early on. By doing so, startups can establish value, generate revenue, and position themselves for long-term success.

This is surely the case in a levelled startup ecosystem… however, often underrepresented entrepreneurs find themselves undervaluing their services or offering them for free as a survival tactic.

While this may seem like a necessary strategy in the short term, it often undermines the long-term viability and growth potential of their ventures.

Strategic partnerships remain still, the strongest means to level the playing field for underrepresented entrepreneurs and these partnerships often lead to valuable collaborations and meaningful impact.

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