Picking the right pricing strategy has wide-ranging strategic implications for your sales and marketing plan, so deciding if you want to follow a volume pricing or premium pricing model has implications that need to be considered carefully.
Whilst price elasticity is a really interesting topic, it's difficult to measure especially for startups who don't have the experience, data or volume to truly test which price level will deliver optimum pricing.
However, the idea that you can have two approaches to pricing, one which creates revenue from volume and the other that generates revenue from high ticket prices is an important consideration for a new business.
Accountants have a number of approaches to this, depending on whether you want to cover all of your costs directly or by effectively diluting your costs, but we are approaching pricing from the customer standpoint.
At the two extremes, we have low price high volume pricing models and high price low volume models (premium pricing). Deciding on the route early on in the strategic planning cycle is essential as it will impact on your product, sales and marketing design decisions.
Low price, high volume pricing attracts larger numbers of customers, but generally produces a lower margin per sale and requires a minimum level of sales to be profitable.
On the plus side, it's a lower risk, as losing 1 customer has a much lower impact on total revenue and smooths out your cash flow. This will obviously be of interest to investors who want to see a balance between growth and risk and will price accordingly.
The higher numbers of sales being made can have a positive cultural impact as you and your team see sales coming much more often. For a scaling business, this can be an important consideration as you want to avoid high staff turnover, especially in a competitive labour market.
It does require a focus on volume lead flow and an efficient sales channel and a large addressable market to be viable but may also open up new sales and delivery channels.
High pricing, on the other hand, means that each sale provides a larger contribution to fixed overheads, but requires the product to stand out and deliver equivalent levels of value to justify the price tag.
Premium pricing is well suited to products aimed at larger enterprise level clients where there is a long sales cycle and potentially a higher commitment of resources prior to the sale being committed.
The downside is the risk, as a smaller number of sales means that losing one has a significantly higher impact on revenue and you run the risk of widening the decision-making group as budgetary restrictions may require more people to sign off on the purchase.
Committing to a Premium pricing model requires committing to a premium product model as well, so there is a need to invest in quality manufacturing and service delivery plus higher marketing costs if you want to justify the price.
In the ideal world, there is a right price point, one that offers maximum profit for your business, where declining price and increasing volume hit the margin sweet spot.
In reality, though, our customers and our own aspirations will dictate where we price our products, coupled with an understanding of where we are as a business. The key is in understanding that pricing has an impact on more than just revenue, and we have a choice.