Pricing – it’s all about the business model

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Of the many questions I get in mentoring sessions with founders how to price their product is one of the most common. Here are some of my replies to this question (yes, I most often answer a question with more questions!):

  1. Determine your business model first – is it subscription? One-time fee? Freemium?
  2. What do your competitors charge?
  3. What do other products used by your target customer cost?
  4. What is the cost of substitute solutions to the problem your customers have?
  5. What gross margin and net profit do you need to keep your company cash flow positive?
  6. Can you compute the ROI for your customer in using your product and test that with prospects? If they buy into it, so to speak, ask them what percentage of that return they would be willing to share with you. Use ranges, like 5% to 15%, don’t ask an open ended question. You could even build a spreadsheet model for your prospects and let them use it to determine their ROI.

But attempting to determine pricing before you figure out your business model is like trying to figure out how long it will take you to get somewhere before you decide whether to walk, bike, drive or fly.

Freemium is a very popular business model, for example The New York Times allows people access to X number of stories before they need to become subscribers to the online edition to access more.

Hal Varian, Chief Economist at Google, published a great list of freemium business models years ago on Wired.com. It’s just as valid today as it was then.

This list won’t answer the pricing question for every founder, of course, but especially if you are in a content-related business it might help you with your business model which is the first, and critical step, in determining what your pricing should be.

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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