4 Arguments to Support the High Pricing Strategy for your Startup
Today is the first day of your startup. You know your competition. You know your product. You want to make money. You want to sell. Then you start researching and you get to know the 20 Pricing Models and you feel lost in space. Basically all of them lead to the same old choice – sell low price with high volume and high price with lower volume. The decision to go low cost or high cost is as old as business. Chances are that you (1) are a startup with new service, (2) you don’t have clients and (3) you can afford to undermine the competition with your lower price. This strategy will bury your business! These are the four reasons why I believe in quality and high pricing strategy.
1. Price is accepted as metric of quality for your startup.
Quality costs money – this is what customers know and what your startup quickly realizes too. It is also true that sometimes you pay for the brand rather than the product itself but even in this case a strong brand to pay for acts as insurance for quality. Western business communities look with suspicion on products and services that that sell inexpensive. Hence your low price may actually be a barrier of a sale rather than an incentive for more sales.
2. You target a group that is extremely price sensitive, not value-sensitive
Going low cost automatically means that you attract a share from the market that is price sensitive. Therefore you might expect that when the next startup enters the market the same way as you, your customers will be gone. Chances are that you build a highly unsustainable customer base.
3. You cannot achieve economy of scale when you are a startup
As soon as you hopefully win a specific market share so the bigger players see you on their map of competition, the easiest for them is to summon their economy of scale and lower the margin for a few months to a level you cannot afford. Then you are out of business.
4. Inventory and Financial Indexes depend on your pricing strategy
I will try to explain it as simple as possible without getting deeper into financial terminology. Lower margin strategies require higher volume of sales for your startup. Higher volume of sales require higher inventory. Higher inventory means that you keep more on stock and your assets go higher. In order to balance assets you need more liabilities in the form of up-front equity or debt. Meanwhile remember that you are selling with a lower margin so your gross operational income is likely to be low too before (it at all) you reach a significant market share. In the end your startup has high debt and low operational income to cover it.
The bottom line here is that before you start your business you must be absolutely aware how you differentiate from your competition and align your pricing strategy accordingly so you meet the quality levels needed. If clients want your product, they will find a way to pay for it. In the next article I shall reveal some tricks to earn back your flexibility.