3 Rules of Pricing for your startup   1 comment

I get asked this question about pricing strategy by many friends who are trying to start-up their own companies. In my observation a successful pricing strategy needs to follow three simple non-negotiable rules.

Rule #1: It Allows You To Remain In Business

You must let the pricing allow you to remain in business, period. If you are looking at selling a product you need to price your products so that it pays for what it takes to bring the product or service to the market. There are three main components that any pricing strategy should address.

.) The recurring Fixed Cost of running your business.
.) The recurring Variable Cost of producing the product or service.
.) The payback towards your one-time costs.

It’s normal to have a company with zero Fixed Costs in the short term. This is a major factor in giving you an advantage over large companies. See my other blog on the level playing field for entrepreneurs.

Rule #2: It Doesn’t Lose You Customers To Competition

This is a very important rule especially because it’s sometimes difficult to convince yourself that markets are really smart. If you price above the market you’ll lose business, period. There are two simple components to ensuring this rule is met:

.) Keep your costs at the Minimum. Carefully identifying all possible Process, Source, and Resource optimization.
.) Keep your Markups at the Maximum the market will allow. The market includes both your customers and your competitors.

It is normal to have some trial and error in getting these right however, the key in this is be reactive in your approach and don’t miss hints from customers.

Rule #3: It Reflects The Value To Customers

This is by far the most interesting fact of the pricing strategy. No matter the size of the company, the quality of people, or what it takes to provide it, if you price the product above the value it creates for your customers you will loose business, period. There are three very simple components of value:

.) Why are they getting it?
.) What are they getting?
.) Who is providing it?

The most encouraging aspect of this is that all three of these questions have very fluid answers as the industry changes. Everyday your competition is changing, and everyday customer behavior is changing, you need to pick up the delta in each change and maximize it for your company. I always question stealth mode for companies and will address that in another blog in the future.

Go entrepreneurs!

Samir Shaikh
SlabTile Networks
Your home improvement, simplified!
http://www.slabtile.com

Posted March 13, 2010 by Samir in Entrepreneurship, Uncategorized

One response to “3 Rules of Pricing for your startup

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  1. Great notes,, I like your blog..

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