You’ve found your demographic, mapped out the buyer journey, and invested your time and money into making your product the best version of itself. Now all that’s left to do is set the price and get your product on the market. Simple, right?
Not exactly. Pricing your product may seem small fry, but it’s one of (if not the) most important decisions you’ll make on your path to launch. Overprice your product, and your customers won’t pay. Underprice, and they won’t perceive the value of your product.
Startup product pricing is more than math—it’s strategy. To get it right, you need to know how to build a model that’s the right fit for your market, customers, and business. In this guide, we’ll show you how to do just that.
Why pricing is critical for startups (and why most get it wrong)
A well-thought-out pricing strategy puts a business leader leaps and bounds over their competitors, brings in the right customers, and builds sustainable revenue that drives success.
However, there’s a problem. Most business founders are going about pricing the wrong way. Why? Here’s a common statement that leaders will use to justify a price point.
- ‘My three main competitors charge $100, $120, and $160, so I’ll set my price at $130 to fit into the current market.”
If you’re considering this approach, here’s some food for thought: who’s to say your competitors understand the market any better than you do?
Millions of businesses benchmark their product price based on their competitors, but if every business is mirroring their competition, it’s like the blind leading the blind.
Your competitor’s business model is notyour business model.Just because something works for them doesn’t mean it’ll work for you. You need to create a pricing strategy that aligns with yourbusiness, your product, and yourcustomers.
Plus, why follow the competition? Your product is unique. You can’t stand out if you’re trying to blend in with the crowd. If you want to make a startup product pricing strategy that actually works, learn your customers and the pricing strategy aligns with your business model.
The 5 essential pricing models for digital products
Before we get into choosing the right pricing strategy for your business, you need to know the different models available to you. Here are five to consider:
Lifetime pricing
With flat-rate pricing, your customers pay you a single, fixed fee—one product and one price for everyone. The customer then gains lifetime access and can use your tool on their own time.
This pricing model works particularly well for high-value tools that are unlikely to change dramatically from month to month. For instance, a course, ebook, template, or image.
It can also work well for products with broad use cases, like an AI tool, though if you’re regularly investing to update your product’s capabilities, you may find that your flat-rate prevents you from recouping ongoing costs—great for early investments, not so great for long-term scaling.
Subscription pricing
Subscription pricing means your customers pay for your product on a recurring basis—usually monthly, quarterly, or annually. In return, they’ll get continued access to your product until they cancel their subscription.
This model works excellently if you have a product with a high-value use case that will provide consistent long-term value to your customers. It’s also a valuable way to produce a consistent, predictable cash flow if you intend to provide ongoing support and upgrades with time.
Tiered pricing
Tiered pricing involves giving your customers multiple subscription plans to choose from based on the features and level of support they need.
This is particularly popular for SaaS pricing models, as SaaS businesses have a broad range of use cases. It allows for easy audience segmentation—with different pricing models for different budgets and the specific features each customer profile requires.
You’ll also find that this pricing model is excellent for increasing average revenue per user (ARPU) because it encourages users to upgrade as their needs grow. Offer increased value at each consecutive tier, and you can gradually nudge users toward higher-priced plans.
Freemium to Paid
Freemium combines “free” and “premium,” as you’ll have gathered from the name. It involves offering the most basic version of your product for free. Users can then upgrade to a more advanced version for a fee at a later date.
This model is particularly strong at driving early adoption and reducing friction at the bottom of the sales funnel. Customers are far less likely to abort at the point of sale if they can try your offer out for free.
The trick with freemium models is to offer enough value in your free package to make it enticing. That said, there’s a balance to be had. If you provide too many features at no cost, it could dilute value perception. Give enough content to hook people in, but make sure the customer can see why upgrading is the right decision.
Usage-based / Pay-as-you-go
Usage-based pricing charges customers based on how much they use your product. It’s a useful model for APIs and infrastructures, as well as any other utility-based SaaS products.
For instance, a cloud storage platform will often charge users based on the amount of data they store and transfer. This is hugely beneficial for the business because it aligns revenue with actual customer value. They only need to spend money on the capabilities the customer needs. Naturally, customers appreciate this too: they only pay for what they use.
The main downside here is that pay-as-you-go makes revenue unpredictable. It’s challenging to accurately predict how much each customer will use each month, meaning profit can fluctuate.
How to choose the right pricing strategy
Five models to choose from, but which one to pick? Here are three core questions you can ask to narrow your scope.
What value is my product providing?
You need your pricing to be natural in the context of your product’s value.
Subscription and tiered pricing, for instance, is ideal for products that have a broad range of use cases and deliver ongoing value. Think of SaaS products, where users expect advanced features and constant updates, for instance.
On the flipside, if your product isn’t going to change regularly, there’s no use pricing with a subscription model. Lifetime pricing is best when you’re providing a product with instant, one-time value.
Your decision will also depend on your audience. Subscription-based models work well for B2B solutions, where clients want predictability and ongoing support. For B2C, the goal is to make pricing as frictionless as possible, making lifetime access and freemium both valuable options.
Know your value and how you’re going to deliver it, and use this to inform your strategy.
Who’s my ideal customer? How much are they willing to pay?
To decide which pricing model is the best fit, you’ll also need to assess your audience’s willingness to pay. Answer these questions as a starting point:
- How muchdisposable income does my audience have per month?
- How much do they need to solve the pain point they’re having?
- How much are they willing to spend to solve that pain point?
Use surveys and interviews to gather this information. Tools like Van Westendorp’s Price Sensitivity Meter also offer a tried-and-true way to determine consumer pricing preferences. Based on the information you gather, you can then decide on the best option.
As an example, if your audience wants a rapid solution to their problem and has disposable income to spare, a lifetime fee could be the answer. Customers looking for a long-term commitment? Try a subscription model. If budget is an issue for your ICP, a freemium approach could drive early adoption and convince your audience you’re worth the investment.
The customer is at the heart of every pricing strategy. Ultimately, they’re the ones making the payment—your strategy needs to align with their needs, budget, and expectations.
Which model aligns with my CAC/LTV dynamics?
Your pricing strategy must support your customer acquisition cost (CAC) to lifetime value ratio (LTV). In other words, you need your customers to make you significantly more money than it costs to bring them on board.
If your customer acquisition cost is high,you should opt for a pricing model that promotes long-term retention, such as:
- Subscription-based pricing: Helps to recoup the cost of acquisition gradually, provided you’re consistently delivering updates that provide long-term value.
- Tiered pricing:When properly structured and enticing, can guide customers on lower tiers to more advanced packages, significantly boosting LTV.
- Freemium to paid:This can, in theory, reduce your CAC. That said, it depends on how enticing your premium offer is. It’s not viable long term if you can’t convert en masse.
- Usage-based pricing: Lifetime value will scale with usage, which can offset acquisition costs, but this is unpredictable and potentially dangerous if customer churn is too high.
If your customer acquisition cost is low,you have more freedom. If a customer only costs $30 to acquire, a $100 flat-rate fee is a solid option. Freemium also becomes more viable as even a small percentage converting to paid plans will cover costs.
Balancing your customer acquisition costs with your pricing strategy is the key to staying profitable. If you opt for freemium but it’s costing you hundreds of dollars to acquire a customer, you’ll end up underwater if you can’t convince enough people to switch to a paid package.
How to price a digital product before launch
So, you’ve landed on the pricing model you’d like to use. It’s a great start, but as you know, this won’t help you decide on a final price.
Startup product pricing is quite a personal task. You need to consider your own economic needs, cost of production, and overall market, as well as your ideal customers’ willingness to pay, to land on the right figure.
While we can’t cover every consideration in this guide, here’s some advice to keep in mind.
Your product comes first—not your competitors
Is it important to look at the competition when deciding your price? Of course. If you set your digital course at $200, but a competitor has theirs set at $75, you may find it harder to convert.
That said, you know the unique value of your product. If your offer is distinct and provides far more than your competitors could ever muster, why follow the pack?
As long as you know your audience and can convince them you’re the clear choice, you can set a price that reflects the value you’re offering rather than trying to fit into the existing market.
Don’t aim for perfection—aim for learnings
Many founders fall into the trap of tirelessly optimizing their price before they’ve made their first sale. This isn’t the right approach.
Your customer drives your price. There’s no perfect number, and obsessing over it will only slow you down. Rather than expending all of your effort to get it right the first time, gather data from your initial price point, and use it to learn.
The best pricing information comes when you understand how much value your product truly delivers and how much your customers are actually willing to pay. That kind of data only becomes available once you’re in the market.
Price with flexibility to gather feedback
Expanding on the previous point, the goal at the beginning of your launch is to get feedback. To gather it, be willing to offer your product at different price points for different customer segments.
Coupon codes, early-bird offers and limited-access deals can help you measure interest without committing yourself to a fixed price. Once your customers have had the chance to test your product, ask for qualitative feedback to determine perceived value. This data will help you refine your positioning and pricing with time.
As a plus, these digital product pricing strategies can also create urgency, helping to drive mass adoption in a shorter space of time.
Psychology of pricing: Techniques that drive conversions
Decided on a pricing model and a ballpark fee? The next step is to make the fee you set go further for your business.
Pricing psychology can significantly alter how your cost is perceived. Here are four tricks worth knowing:
- Anchoring: Involves displaying a higher price first, so that every following price looks more reasonable in comparison. This works particularly well for tiered pricing models for digital products. Don’t be afraid to show your most premium offering first.
- Charm pricing:Yes, $29 really does look better than $30. Charm pricing taps into how our brains process numbers, making costs seem significantly more affordable. This reduces friction for price-sensitive customers.
- Price-relative value: Rather than positioning your product as a cost, position it as an investment. Show a believable outcome tied to your price, and you’ll help your customers see why the initial spend is worthwhile.
- Plan naming:For tiered digital product pricing strategies, names are more important than you think—they impact the value consumers expect. For instance, “Premium” sounds vague, whereas “Pro” is made for professionals. “Standard” is meaningless, but “Starter” is perfect for beginners.
When you do it right, pricing psychology will clarify value and remove barriers for your customers at the bottom of the funnel.
Common pricing pitfalls and how to avoid them
Let’s wrap things up with some of the top mistakes we see business founders make consistently, and how you can avoid falling into the traps.
Underpricing due to fear of rejection
Many founders price themselves far too low because they worry consumers won’t be willing to pay. This fear of rejection holds businesses back and eats into margins.
Stand behind the value your product delivers and know your worth. Ultimately, confidence is what’s going to launch your products into the laps of your audience. If you don’t believe in your offer, no one will.
Hiding pricing behind demos or walls, causing friction
No customer wants a mystery price tag. Unless you’re running a business that exclusively provides complex enterprise-specific solutions, avoid making your customers book a call just so they can find out how much your solution costs.
Make your pricing transparent and easily understandable from the offset. This leads to trust, and trust leads to conversion.
Overcomplicating your pricing tiers
Considering dividing your product into three plans, ten tiers, and twenty optional extras? It’s easy for things to get messy.
This isn’t about the number of packages you have available. Many exceptional businesses have dozens of products but no issue with conversion—just look at Salesforce and their all-encompassing range of CRM solutions for proof.
The issues start when your customers can’t decide which tier is right for them and why one package costs more than another. Keep your packages distinguishable, check they have a valid reason to exist, and ensure they have a specific customer profile they’re designed for.
Not revisiting your pricing
We’d all love it if pricing was a set-and-forget decision, but it isn’t. Your product will grow, your audience will shift, and new competitors will come out of the woodwork.
If your pricing hasn’t changed for one or more years, chances are it’s out of sync with your current value, your customers expectation, or the overall market. Make a habit of reviewing and iterating based on the data you gather over time—even small changes can have a big impact.
Summing up
A great product with a poor pricing model is always going to underperform. Pricing is perception—you could have the best solution to a pain point in the world, but if your ideal customer profile doesn’t feel like they’re making a smart investment, you’ll get nowhere.
Set a price that aligns with your business model and resonates with your customers’ expectations. Above all, don’t forget the value you’re offering. Just because a competitor tries to undercut you doesn’t mean you need to stoop to their level if you’re offering more than they could ever achieve.
Along the way, remember that pricing is never set in stone. It’s a dynamic process that you’ll need to tweak and revisit as you learn more about your customers, your market, and your business’s needs.
Next steps
If you’re looking to apply some more advanced techniques to learn how to price a digital product, tools like ProfitWell, Paddle, Stripe Pricing and ChartMogul can help you get smarter insights into your pricing strategy and optimize it as you continue to scale.
Ready to turn your digital product concept into a reality? At exceptfriday, we will evaluate your go-to-market strategy, take the time to understand your ICP, and help you design a pricing model that drives serious growth. Get in touch today to take the first step.
