You don’t want to fool yourself into thinking you’ve got a real business when you’re only making sales because you’ve significantly underpriced. How will you know if you’ve got a product or service valued by the marketplace if you price it at sub-market prices? Pricing a startup’s products or services too low is like running a faulty test. Second, low prices send false signals to entrepreneurs.Low prices send the message to prospective customers that the value of your product or service is low. This was misleading because our software was genuinely the best in the marketplace. Our pricing was substantially lower than our main rival and our low prices were causing prospects to believe we had a less valuable product. The SaaS company I mentioned at the outset was having this problem.
Many prospective customers are actually scared off by low prices.
I also see this phenomenon play out with my entrepreneurship students here at the University of Utah’s David Eccles School of Business: many reflexively go to price as a key means to help their startup compete with incumbent companies. Given that pressure, it’s almost inevitable that many startups underprice their products and services in an attempt to land customers and generate revenues. What are the two things startups are desperate for? Customers and revenues. I wish I could say the pricing problem with this SaaS startup was an exception, but in my experience of advising, investing in and serving on the boards of more than 20 startups, it seems to be the rule. Later, with an insightful new CEO and CFO the company undertook a major overhaul of its pricing to align it with the tremendous value the startup provides to its customers. The CFO seemed shocked that such a high retention metric could be bad, but as we dug into things the rest of the board came to agree that we had a pricing problem. If customer churn was really that low, we were underpricing. I didn’t want to be a killjoy, but commented that, in my opinion, this was actually a bad sign.
At a board meeting a while ago, the CFO enthusiastically announced that the company’s customer retention rate was 96 percent. I’m on the board of a venture-backed startup that sells software-as-a-service.
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