Should Startups Price their Products too Low?

Recently, I was going through the websites of many newbie startups started by first time entrepreneurs and found that almost all of them have priced their products or services very low. In this post, I will tell you why this is one of the very bad pricing strategies and is a recipe for ultimate disaster.

First of all, we should understand what makes a startup founder price his products too low...

The various reasons cited by entrepreneurs are:
  1. Keeping prices low helps them attract customers.
  2. Keeping prices low helps them gain more traction in the market by creating demand.
  3. It reduces their sales & marketing efforts since products get readily accepted due to low prices

But! Believe it or not, this strategy is a recipe for disaster and many startups have gone bust due to this single most unforgivable sin of pricing their products too low.

Startups should not price their products too low. If you adopt a Low Pricing strategy, you will face the following challenges:

1. Low Price means Less Salary for Sales Persons, ultimately No more sales.

  • If you keep your prices too low, you might be able to convert the deals in the beginning. But when you will receive payments, you will realize your margins are too less to sustain. 
  • In order to sustain, you must increase your sales volume or deal size which is only possible if you have a great sales team. But, since you are already running on thin margins, you would not be left with any free cash for giving them a pay hike. 
  • Sales Persons are highly motivated and hence highly ambitious in nature. Thus they would be reluctant to work for lesser pay. This means you might lose your sales team in the long run thus affecting your future prospects of growth.

2. Too Low price is perceived as synonymous with Low Quality.

  • If your products are priced too cheap, then usually customers perceive them to be of Low Quality. 
  • B2B clients need your solution for their organization so they expect the highest level of reliability. Thus they tend to be more quality conscious instead of being price-conscious. This is reflected in their purchase behavior wherein they tend to avoid too lowly priced solutions. 
  • Nowadays, This is true not only for B2B clients but also for B2C customers.

3. Low Price means High Customer Dissatisfaction

  • If your products and services are priced too low, it gives you a thin margin. This means you are not left with much cash after your operational and administrative expenditures. 
  • Thus you would not be in a better position to invest in dedicated customer service roles. This will ultimately affect your customer satisfaction rate and will result in customer attrition in the future.
  • Now you may say, that your Sales representative can act as Sales as well as a Customer Service rep. But practically, this will distract your sales team and it would adversely affect their productivity. 
  • Always, let your sales guys completely focus on sales. That's how they will be able to crush sales numbers.

4. Low Price means No cash to fund growth

  • If you are running on thin margins, you will end up with lesser cash to reinvest in your growth plans.
  • Without re-investing in growth and innovation, you will not be able to innovate at par with competitors and ultimately you will end up losing your customers to competitors.

5. You can never win customers on Price War

  • Startups try to put a low price tag in order to increase demand in the market and gain traction. In this way, you might gain a few price-sensitive customers. But with low prices in the beginning, those customers will slowly get habituated to the low prices.
  • Later they would demand deeper discounts in order to continue using your products and services.
  • If any other competitor with a deeper pocket would offer them a little more discount, they would readily switch to that provider.

Thus, a Good Pricing strategy is to tag your product with the Right Price based on the value it offers to your customers. 

Instead of pulling customers by lowering prices, try to win them by offering value. 

Offering value helps prevent them from switching to another competitor even if you are priced a little higher than your peers in the market.

I hope this post would help you refine up your Pricing strategy! Do let me know your thoughts on this...

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