Who Owns Pricing in Startups and Emerging Companies?
Pricing is a top imperative in startups. It’s a must-have; you can’t sell products or services, or generate revenues without it. It’s a key to the company’s initial and on-going go-to-market strategy and success. It’s also a central element in business and financing plans, and in the operations of the company. In addition to all that, pricing makes a statement in the market.
The person who owns pricing, therefore, is very important. Yet amazingly, many startups simply don’t assign the responsibility of pricing to a single individual. If they did take on that assignment, that person would ultimately craft the startup’s first pricing and first price list. He or she would also guide the company through an on-going, evolving multi-step process involving expanding executive, management, staff and outside input, involvement and influence.
Interestingly, not assigning pricing to a single pricing owner happens in early stage companies because of one or more of the following.
Many founders regard pricing as a way to retain their involvement in business planning, financing, GTM, operational and other processes in the growing company.
In most cases the startup CEO regards pricing as a key executive management undertaking but does not have enough bandwidth to handle all the activities required to get it right. The CEO knows he or she cannot unilaterally dictate pricing (at least not effectively), founder involvement is desirable and an atmosphere of consensus needs to be fostered. Thus, the CEO may be the ultimate decider but some sort of pricing team must make its recommendations before a price list is finalized.
The company lacks very senior industry personnel or proven business analysts who can arrive at a price list intelligently. However, there’s simultaneous pressure to do so stemming from the team’s technology understanding or desire to disrupt the incumbent vendors.
Early-stage companies would be better off doing three things: (1) hiring a product manager with pricing experience; (2) hiring an accountant instead of a bookkeeper who can provide input into pricing and (3) hiring sales personnel who have had experience setting pricing in startups and emerging companies. Put them all together and you get a pretty good early-stage pricing team.
There are many considerations that go into setting a price for an initial product or service. They include: present value, direct and indirect costs, IP (often hidden), competition and future value. In addition, your product or service pricing may be determined based on various strategies and elements such as: demand, cost(s) and margin analysis, competition, marketing, geography, incentive(s), psychology and more. When you have multiple products, there are more variables so the calculus gets even more complex.
For startups, there are usually six prices of the product or service to start off with:
The price related to proof of concepts (POCs) when they are sold to customers,
The manufacturer’s suggested retail price (MSRP),
The introductory price (usually discounted from MSRP) for first direct customers (~20),
The distributors’, resellers’, integrators’, consultants’ or others (e.g. trainers’) price,
The expected price the end-user will pay, and
The average MSRP price charged by competitors.
In addition, the way a price is conveyed in a subscription or license, and the terms and conditions, play important roles determining revenue collection and customer base growth.
The question, though, is who should own pricing (processes, lists, deal calculus, etc.) in startups and emerging companies?
One answer is that standard practices call for pricing owners to change by startup stage:
Founders and, if applicable, the first CEO and a senior finance resource ideate and ultimately develop a working hypothesis of the company’s mission, service offering or product, how it sells and pricing. Go-to-Market, total addressable market (TAM) size, projected customer base, etc. are mostly thought through over time after research, discussions with industry veterans and potential investors.
Comment: Frequently, the pricing developed at this stage is at a lower price point to either encourage purchases or upper bound a price point to signal high value. The best approach is carrying out focus groups involving at least 20 prospective customers and to arrive at a baseline price, and then adjust accordingly.
During the later phases of product or MVP development when product release is imminent, the responsibility generally shifts to the founder, CEO and sales person in conjunction with the CTO or VP engineering.
In the absence of an early-stage pricing owner, an outside advisor(s), early investor(s) or board member(s) with pricing experience – no matter how direct or applicable – may play a valuable role in setting prices, policies, etc. Infrequently, a startup will retain a pricing consultant, especially if the product is especially innovative or complex. The head of finance at this stage will help set terms and conditions in conjunction with the CEO and the sales leader.
Comment: MVPs sometimes do not provide the basis for getting indicative pricing for what a customer would pay because it’s not feature complete. Sometimes, for example, a business customer with many potential users will pay more for a product with tutorials and user support – which are often not present in MVPs.
In many cases, the pricing owner will use resources outside the company to help shape pricing, and terms and conditions. These external resources include customers, search engines, Thomas’ Register, industry analysts, and reports published by market research firms and consultants. At this stage, individual industry analysts typically aren’t used to determine or validate service or product pricing because pricing studies are prohibitively expensive, although they may be consulted.
Comments:
Many times, early customers are willing to provide details related to POCs and trial T’s & C’s. However, make sure that you get input from a sample size of around 20 customers to arrive at the baseline.
Avoid the mistake of trying to determine pricing based on attempts to glean direct or indirect competitors’ pricing via the Internet. In short, don’t believe everything you read online. This is especially true of sponsored price comparisons.
After the MVP has been introduced and before the final 1.0 version is released, the responsibility for setting all aspects of pricing as well as deal reviews generally goes to the CEO working in conjunction with the sales manager or account executive.
Comments: This is an important demarcation point because as price setting moves away from personnel with the most customer, distributor or market contact, friction often occurs leading to more discounting and longer sales cycles.
As the company matures through the seed stage(s) and into Series A, the CEO, head of sales or lead account executive, head of finance and often an advisor or early investor contribute to pricing strategy and price list. At this juncture, the company’s product manager typically “owns” pricing while managing packaging. The PM also has responsibilities over ‘SKUs’, tracking competition, maintaining the feature list and may be the Agile product owner. Beyond the margins, the product managers have limited direct power to change pricing.
Comments: The earlier-you can hire a product manager who is the pricing owner, the better. It’s also a good idea to hire one who has an economics background. Competitive pricing, elasticity analyses, segment cluster analyses and other in-depth analyses usually accompany price list recommendations, increasing the probability of sales and EBITDA success.
The worth of the product manager increases as they connect customer input to pricing and find new ways to sell more products to new prospects and expand sales to existing customers.
After Series A, two major changes occur with respect to pricing. First, taking a page out of the VC Playbook, VC “recommend” to the CEO that she or he increase prices by 20%-30%. Secondly, sales operations or the deal desk increasingly determines RFPs/proposals, price quotes or pricing for individual deals and exerts a significant influence on pricing. This helps the Chief Revenue Officer (CRO) or Chief Sales Officer (CSO) make her or his numbers in the plan. At this stage, typically the CRO and CFO “practically” own the price list and ad hoc pricing in conjunction with a product manager.
Comments: The speed and packaging of pricing, bundles and other factors make the deal desk a necessity for the sales team’s success. However, other factors related to pricing are often lost in pursuit of growing ARR. Multi-year contracts are the leading example of a sales desk innovation that can hurt the company in the long-term as the technology roadmap and the drive to profitability plays out.
Post-Series A, sales and revenue operations, the product manager and, ultimately, the CRO and CFO play a significant role in pricing, as does the customer base and competitors. At this point the CEO in general is less involved in tactical pricing discussions. Increasingly the annual budget plays a role in determining pricing decisions. Some companies form pricing teams. Usually, sales and finance leaders hold sway over these team meetings.
Comments: In data- and AI-driven, post-Series A startups, sales and revenue ops are increasingly playing a bigger role in influencing deals, sales, pricing, the sales cycle and other factors.
These standard practices for pricing responsibilities by startup stage may ultimately result in arriving at pricing that turns out to be optimal or suboptimal for the company. It’s hard to tell, and as the saying goes, “Your mileage may vary.”
Establishing the price list, and all the complexity and management interactions that surround its development is critically important for every startup. It’s obvious, therefore, that a full-time person with economics expertise, “hands-on” price-setting experience, and sway with management should be responsible for pricing inside the company.