Pricing Your Product: How to Discover What to Charge in Customer Development

Summary: Figuring out what (if anything) or who (if anyone) will pay during Customer Development is very hard. But if you ask “What Do You Pay for Now?” and dig deeper into this answer you’ll get a lot of insight into the opportunity.

Uncomfortable Talking About Pricing? Me Too

I guess I fit the stereotype: a technical founder who feels like his work is never worth paying for. Thus I have had a hard time talking to people about paying for what I do.

A lot of entrepreneurs I help feel the same way – in my Startup Help Calls they express their discomfort and confusion about how to approach pricing. It turns out you can make this whole process a lot easier with one effective question that I’ll explain today.

Pricing is a MAJOR Risk – And We Need to Test It

The three major risks for most web and mobile startups are Problem, Revenue, and Channel.  So as uncomfortable and confusing as pricing can be, we have to get early signals as to whether customers will actually pay for our products.

Don’t make the mistake I’ve made too many times in my career – waiting to ask about pricing until “I get something built”.  Talking about pricing actually sends a signal that you’re serious, so don’t delay it.

But Identifying the Right Price During Early Customer Development is So Hard Impossible

As I’ve written previously, one of the worst Customer Development mistakes is to ask people to speculate about their behavior. This is especially true when talking about pricing.

In fact, asking people, What Would you Pay for X? is a waste of time even in mature markets. In a classic business case consumers told Ford Motor Company in 1958 they would pay for a medium-priced vehicle with advanced safety features. But what did they actually buy? Style and power, baby. And thus the Edsel became one of the worst marketing disasters in the history of capitalism and the Thunderbird became an American icon.

During early Customer Development we don’t know much of anything – what problem we’re solving, for whom, and how we’re going to do it. So of course asking pricing questions is particularly tough because neither we nor the people we’re interviewing have a frame of reference.

Most of What is Written About Pricing Didn’t Help Me – It was About OPTIMIZING Pricing, Not Searching for Early Signals

To make things worse, almost everything I’ve read about product pricing didn’t help during Customer Development. I’ve read a lot about how to position product levels, upsell, or hopelessly generic advice like, “Don’t price too low!”1

But what are my major questions during Customer Development?

  • Would someone pay ANYTHING to solve this problem?
  • What Customer Persona2 will pay? Won’t pay anything no matter what?
  • How many potential payers are there?

My questions and risks in pricing are not about optimizing the product price. That takes months and years of testing and lots of data. Instead I’m looking for broad signals and patterns about who will pay and roughly how much.

“What Do You Buy Now?”

I’ve found one question that doesn’t rely on speculation and provides great early insight: “What Kind of X Do You Buy Now?”

“X” in this case is your general product category. What iPhone APPS do you buy now? What software subscriptions to you buy now?  And don’t stop with this question – when you hear the answers, dig deeper: ask Why, How Long, etc.

Critical Learning #1 – WHO Buys Things

During early Customer Development our vision of the problem is broad and the solutions are general. Normally we see a bunch of different potential customer segments whose problems may or may not be related.

You can cut through the clutter by identifying two types of people:
1. People who don’t pay for anything.
2. People who pay for all kinds of things.

When I asked this question during my SoHelpful Customer Development interviews I quickly learned that people interested in SoHelpful for altruistic “I just like to help others” reasons often didn’t buy products. On the other hand, freelancers and service providers who helped others to build their reputation, brand, and get potential business pay for all kinds of things.

This insight completely changed my direction for the product.

Critical Learning #2 – Potential Customers’ True Motivations & Real Problems

Always ask “Why” people pay for things. It turns out what people pay for is a great way to get insight into what they really care about – not what they like to think they care about.

Lots of consumers will tell you they care about Privacy. Good luck getting them to pay for it (I’ve tried). During my SoHelpful calls I learned that freelancers and service providers pay to make potential new business relationships and to build their reputation. These are their real problems.

Critical Learning #3 – Their Values & Worldview

I’ve had 2 cars in 20 years and view spending money on status symbols as a total waste. I derive value from driving a piece of junk because it more accurately expresses my worldview. Most of my family thinks I’m just cheap.

Last week I started using ngrok – I got instant value from the product and wanted to send a signal to the team to keep working on it. It is a “Pay What you Can” product and they suggest $10/year. Of course I don’t have to pay anything.  I paid $20.

 

ngrok_tweet

 

Critical Learning #4 – Related Products & a Pricing Range

Finally you’ll learn about complementary/competing products that will give you a signal about the range of pricing you can expect. Someone who buys 5 products for $14.95/month will be a lot more likely to buy a 6th one for $14.95/month than $99/month unless the value proposition is commensurate with the higher price.

I’m Happy to Help You Think Through Your Pricing Challenges

As you can plainly see from this post I’m of the opinion that trying to guess the right price during early customer development is a fool’s errand. Instead we have to make judgment calls based on the limited data we have.

Sometimes it is helpful to talk through pricing challenges with someone else. I’m freely available to help you as I’ve helped other entrepreneurs. Just grab an open 30-minute slot and I’ll be happy to have a Skype call with you.

 

Photo Credit: Bsivad via Compfight cc

  1. While writing this article I did a Google Search on “Product Pricing”. I found this Inc. Magazine article as #2 in the Search results. It contains utterly useless advice like “Know Where the Market is Headed”, and “Know Your Revenue Target”. This kind of generic, feel-good advice has been completely useless to me in the real world when I’m trying build something new.
  2. If you’re interested in learning more about customer personas I suggest reading LeanUX by Jeff Gothelf

10 Comments

  1. Jim Kaz August 18, 2013 at 4:32 am #

    Kevin,

    Nothing to add, but I did want to say nice article. Keep up the good work.

    Cheers,

    Jim

  2. David August 18, 2013 at 9:43 am #

    #goodread thanks a lot Kevin !
    We’ll try that in our next meeting 🙂

    Greetings from Germany
    David

    • kevindewalt August 18, 2013 at 6:21 pm #

      Great! Let us know how it works for you!

  3. Bruce McCarthy August 19, 2013 at 8:53 am #

    I’ve used this technique very successfully, doing interviews for my forthcoming roadmapping tool, Reqqs. Thanks for the reminder to keep this on my list of research hacks!

    • kevindewalt August 19, 2013 at 8:57 am #

      That’s awesome, Bruce! Given your high profile with product managers worldwide I’m sure you’re getting great feedback on Reqqs.

  4. David Telleen-Lawton August 19, 2013 at 11:43 am #

    Kevin:

    As always, your clear thinking and straightforward way of expressing yourself helps us all get a better handle on what we do and why or works or what we should be doing. Thank you.

    One of the key points I try to emphasize is Fact before Opinion. Your description is a great example of that concept. It works for all aspects of Market Validation and Lean Startup, but for pricing, it’s particularly valuable.

    Just reinforcing what you wrote:
    In the past year, what have you bought to solve this problem? What about that product attracted you? How did you justify it? Who had to approve it? What were your expectations, how did it go? Have you bought other products? Go from there. Understand the facts of what they have done. As Kevin points out, it’s more likely that they will continue to do the same than change course.

    Now for opinion:
    What product do you have today — which sits on a network and provides important data security — and is of somewhat equivalent value to you as our product appears to be? Compared to that, would you expect our product to be warrant a higher price? How would you justify that pricing to your manager?

    If we did this, this, and this, what would you expect to pay for it? How many would you use? Who would use it?

    Importantly, you would expect their answers to be consistent with their past actions. If there is a disconnect between the answers to these opinion questions and the facts which you already have gotten, (The last four I bought were $19.95, but I’d buy yours for $99.99), then now you have the information (facts) to probe deeper to understand what it is about your product that would make them want to pay 5x… or understand why they are not interested at all.

    In many cases, their opinion changes as they think more about the facts…or best case, you learn what really makes your product different, better, easier to purchase, etc.

    Without the facts (past actions), you do not know how to evaluate the opinion (belief about future action).

    One other comment on pricing: you are not going to go broke having 4 users of your product paying less than the next four. Think twice (or more) about every making it free just to get users, but think of the advantages of having the first 4 have a price that is discounted from what you later realize is the true value, but are willing to start using it now. By having PAYING USERS, you can more quickly figure out the true value and how to articulate it than may otherwise happen if you don’t have any users for several months as they wrestle to justify a higher price.

    You can always limit the early pricing consequences by putting a time limit on their usage at that special price.

    • kevindewalt August 19, 2013 at 8:03 pm #

      Great advice, David and I agree with all of your points.

  5. Roger L. Cauvin August 25, 2013 at 7:47 am #

    Thanks for this excellent piece, Kevin. You wisely dispense with the hypothetical “What Would you Pay for X? question and instead of focus on what the prospect pays now.

    One thing I’d add, in the vein of what David Telleen-Lawton mentioned, is that pricing is a function of what the problem currently costs the prospect, or what it costs the prospect not to use your product. Those costs can consist of labor for working around the problem, HR costs related to employee retention, or opportunity costs related to prospect being unable to achieve her goals.

    Part of customer development is using SPIN selling techniques to dig into the implications of the problems the prospect is facing, and to begin to quantify those implications.

  6. Jeanne Rossomme September 15, 2013 at 10:16 am #

    Excellent article! Good, REAL insights!

    • kevindewalt September 16, 2013 at 8:07 am #

      Thank you!

I read EVERY comment and want to hear from you