It’s THE question I get asked all the time…and the one that you need to be able to answer from the beginning.
It’s what every investor will ask you…and if over time you don’t develop a clear and concise answer, it’s the #1 thing that will keep you awake at night because you’ll be running into cash flow problems.
What if you were able to pitch your detailed sales plan so you could tell angel investors where your first 1,000 customers will come from?
What if you could show venture capitalists that you’ve really spent time thinking through what advantages you have over your competition?
And how impressed would your ideal investor be if you could breakdown your sales funnel into specific steps and know how long your product’s sales cycle is such that you can clearly articulate how this feeds into your pricing strategy?
Pause for 20 seconds and reflect on these questions…
This was the point where my conversation with a startup founder veered off from their customer acquisition strategy to their pricing model, because pricing drives who your customer is and how you approach them.
Ultimately it will drive how you get clients.
Most start-up founders will start mumbling something about cost and what a couple of clients told them they would pay…
Never set your prices based on cost. Always set them based on value.
What is the value to the economic buyer of your product/service solution? It should at least 10X what you charge and in any case what you’re charging initially will probably be 2-3X too low.
The price you put on your product is in direct correlation to the value you place on it. If you don’t think it’s worth much, why would a customer pay anything for it?
Only 15% of people buy on price, everyone else buys on value. Think about it, everyone would be driving the cheapest car, wearing the cheapest clothes and never eat out if this wasn’t the case. However, most people will quote the price as the major obstacle to buy your product.
If you’re continuously getting price as a pushback, maybe you haven’t described the benefits of your product well enough…go back to describing the outcomes the customer can expect and the potential transformation that could happen to their business and/or personal life.
If the customer belongs to that 15% that buys solely on price, then you should avoid them like the plague. These are the customers that take up 80% of your time and provide only 20% of your profits. They will probably be the ones who are slow to pay, have unreasonable demands, unrealistic deadlines, and provide constant price pressure.
Get rid of them immediately. The time it will free up can be used to service your best clients, which is where the real goldmine in profits lies…
I saw this quote (not sure who originated it) on Twitter the other day: “Sizing the market for a disruptor based on an incumbent’s market = sizing the car industry off how many horses there were in 1910.”
It speaks volumes, because it’s so difficult to size a market correctly. Ultimately startup founders pitch ridiculously large potential market sizes anyway which are meaningless…as I mentioned at the start – what if you could just show an investor a detailed plan as to how you’ll acquire your first 1000 clients?
A long sales cycle will drive a high Customer Acquisition Cost (CAC) – you’ll tend to need several 1-1 meetings to close the sale, which will take longer than 2-3 months. This means your pricing per sale must be high. Example, Oracle Enterprise Software
A short sales cycle with very low touchpoints will allow for much lower pricing levels. Example, QuickBooks Online
Whatever stage you’re at in business, you need to be all over the numbers. In posts like this, we aim to offer bite-size food for thought – but in a few hundred words, we can only do so much.
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