August 2, 2021 • 11min

Breakthrough Lessons: Price Before You Build

Pattern Breakers

This episode of Pattern Breakers focuses on the critical importance of pricing strategy for startups, based on insights from pricing expert Madhavan Ramanujam. The key message is that founders should determine pricing before building their product, not after. Many startups fail because they can't get customers to pay enough for what they've built. By considering pricing upfront, founders can design products that customers are actually willing to pay for.

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Key Takeaways

Price before product - Determine pricing strategy before building the product
Willingness to pay should be discussed early and directly with potential customers
Consider how you charge, not just what you charge - align pricing model with customer preferences
Segment aggressively and focus on serving the most profitable customer segments
Avoid common pitfalls like feature shock, underpricing, and "undead" products
Without a price, you don't have a product - pricing should be a core focus from day one

Introduction

This episode of Pattern Breakers focuses on the critical importance of pricing strategy for startups, based on insights from pricing expert Madhavan Ramanujam. The key message is that founders should determine pricing before building their product, not after. Many startups fail because they can't get customers to pay enough for what they've built. By considering pricing upfront, founders can design products that customers are actually willing to pay for.

Topics Discussed

The Importance of Pricing Strategy (00:00)

Many startups fail because they can't get customers to pay enough for their products
Pricing should not be treated as a separate decision from product features
Understanding customer willingness to pay should happen at the very beginning
Pricing is more than just a dollar figure - it indicates what customers want and how much they want it
Pricing is the single most important factor in determining product profitability and startup success

Rule #1: Discuss Willingness to Pay Early and Directly (02:00)

Ask customers directly about pricing before building the product
Don't ask "Do you like my product?" - ask "Would this be worth $X to you?"
Understand the customer's specific price range:
- Acceptable price - easy to get, feels like a steal
- Expensive price - they would pay but it feels expensive
- Prohibitive price - they would laugh you out of the room
Example: Porsche Cayenne development
- Only interviewed people willing to pay $70,000+
- Focused on high willingness-to-pay customers' preferences (e.g. cupholders over advanced shifters)

Rule #2: Consider How You Charge, Not Just What You Charge (04:01)

Consider different pricing models:
- Subscription
- Dynamic pricing
- Per-seat pricing
- Usage-based pricing
- Freemium
Align pricing model with how customers run their businesses
Consider factors like billing cycles, planning cycles, decision makers, tax incentives
Ensure pricing model is predictable, flexible, fair, and transparent
Don't just copy competitors' pricing - force a choice, not a comparison
Make pricing customer-relevant as the starting point

Rule #3: Segment Aggressively and Focus (06:01)

Identify optimal fit between important segments and correct features/pricing
Key principles of segmentation:
- Cluster customers by willingness to pay, value proposition, and needs
- Ensure clear distinctions between segments
- Start with 3-4 segments, expand gradually
- Don't try to serve every segment - focus on attractive ones
- Describe segments so you can address them specifically
Make segmentation models actionable for marketing and sales

Common Pricing Mistakes to Avoid (08:01)

Feature shock
- Product packed with too many features
- Hard to explain, nothing stands out
- Results from uncertainty about what customers truly value
- Solution: Focus on essential features people will pay for
Underpricing innovations
- Thinking of price as a math problem instead of a psychology problem
- Example: Chegg's textbook rental pricing strategy
- Experiment with higher prices based on customer psychology
"Undead" products
- Overestimating product appeal due to novel technology
- Failing to segment customers by willingness to pay
- Example: Segway - brilliantly engineered but a $7,000 flop

Implementing Pricing Strategy in Your Startup (10:02)

Design around price from the beginning
Talk to customers about willingness to pay from day one
Ask "Would you pay $X for this?" and probe reasons for "no" answers
Ensure pricing model matches customer preferences
Don't automatically copy competitors' pricing
Focus on segments where you can be well-paid
Make price your core focus to increase odds of success

Conclusion

The key lesson from this episode is that pricing strategy should be a core focus for startups from the very beginning. By determining pricing before building the product, founders can ensure they're creating something customers are actually willing to pay for. This involves discussing willingness to pay early and directly with potential customers, considering how to charge as well as what to charge, and segmenting the market to focus on the most profitable customer segments. By avoiding common pitfalls like feature shock, underpricing, and creating "undead" products, startups can dramatically increase their chances of success. As Madhavan Ramanujam emphasizes, "Without a price, you don't have a product."