How to think about pricing for your startup?

Pricing: This one word makes even the most experienced founders wobble. "How did you come up with your pricing?". This is something we ask our founders a lot. Can you explain to us the physics behind why X and why not Y? Some founders replicate replacement cost, some replicate peer pricing, some price for value, and so on...

However, what is the right way to do this?

Even we do not know!

But the more we think about pricing, the more clarity we get. There are three major schools of thought when it comes to pricing in our opinion. And these are what startups should pursue: Maximization, Penetration, and Skimming. All the three are different in a way because they prioritize growth, market share, and profit maximization differently.

How? Let's take a look:


This just means revenue growth in the short run. How can you maximize the revenue growth of the company in a short period of time, and what do you need to do it? Startups usually do this when there is no clear differentiation in the customers' willingness to pay, the customer segment is homogenous, and there is no difference between optimal short and long-term pricing. Most health-tech companies, and software companies at a certain maturity level do this in order to grow rapidly and get to scale. We have seen many companies prioritize maximization at any cost to fail spectacularly because they perineally operate at negative unit economics to focus on growth.


This means to quickly gain dominant market share by deliberately pricing low. This is what Jio did to penetrate into the Indian telecom ecosystem. Low prices minimize friction of adoption, help you grow quickly, and help you move up the chain once you have a decent scale. We have seen many companies say we will deliberately price low to capture a dominant market share, to only quickly shut shop. Any penetration strategy requires a product with immense value, coupled with a very strong balance sheet.


This means to maximize profits. Expand profits first, revenue will follow. This works in the case of product companies like Apple or Tesla. Products are deliberately priced in a way to maximize profits. They only want diehard customers who are ready to pay any price. They play the mindset of the customers that have the ability and willingness to pay a certain price as early adopters. Again, as with penetration, skimming can only be successful if you have a product with a strong fan base. Otherwise, you are just expensive

Startup pricing is not very easy. These strategies should be explicit for the startup and its employees to align their effort and expectations. Everyone right from the product, engineering, marketing, sales, and finance should be on the same page when it comes to the pricing strategy. And this is where the true strength of a company lies.

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