Written by: Dave Dabbah 11/29/2023
Over the past 20 years in Silicon Valley I’ve spent hundreds, maybe even thousands of hours working with startup teams trying to uncover why customers purchase their products and services.
On paper, most of these startups first became startups during their early funding rounds by simply being able to explain to investors their products' market potential. Sure some of them dazzled potential investors with alpha products and demo’s, but when the investors moved into the due-diligence stage, they always looked closely at the market potential.
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The acronyms worth mentioning are TAM SAM SOM — which stand for Total Addressable Market, Serviceable Addressable Market, and Serviceable Obtainable Market. These terms represent metrics that help most companies define the customer and revenue opportunities within their market.
The reality is most startups go out and build products and services based on a hunch. That hunch also includes some initial thoughts on what customers will be willing to pay for their products. This my friends is simply just part of the innovation process.
Now instead of just focusing on the term product-market fit, I like to flip it on its head and call it price-point product market fit. This simple play on words actually ensures that everyone involved in determining your company's actual product market fit incorporates the importance of how price points ultimately affect your market opportunity. The actual price can affect everything from sales cycles to whether or not a potential customer even considers your product or service.
For new brands achieving strong product-market fit is truly the holy grail of any successful B2B or B2C company. It's the sweet spot where your product or service aligns with what your target audience needs and desires.
This delicate balance of product, customer needs and building a pricing strategy that works for your customers and your company ultimately can ensure sustained growth, customer retention, and profitability. In this blog, we'll explore why pricing is crucial in achieving product-market fit and how you can effectively leverage it to drive success.
Let’s start with the age-old question of why someone is willing to pay for your product or service. Why do they need your product? Why are they willing to buy your product over another? Finally, why are they actually willing to part with some dollars to pay for your product?
As basic as the above questions are, they are indeed important questions for your management team to understand the answers to those questions.
Now price point product-market fit ultimately means that your offering resonates with your target audience, and customers are not only willing but eager to pay for it. Achieving this fit signifies that you've found the right balance between what you're providing and what customers are seeking.
Another important factor is determining if the price point you’ve settled on will allow your company to be profitable or just skate by. The reality is everyone should be in the business of making money and if you set your price too low or too high your company could quickly be heading the way of the dinosaurs.
Now determining true price point product-market fit is indeed complex. Just look at some these factors:
* Market conditions “economic”
* Sales cycles - how long does it take to close a deal
* Budgets - who owns the budget
* Budget influencers - teams requesting a solution
* Product importance - how valuable is your product
* Competitive pressures - why do you win over the competition?
* Feature wars - which features actually sell your product
* Company stability “the trust factor”
* Build vs buy - we can just build this in-house
* Perceived value - almost always includes saving people time
* Your brand - why do people trust one brand over another
* Upfront costs - what it costs a company to launch your product
* Ongoing maintenance - what it costs to maintain your product
* Employee time - does your product really save people time
Now the above list connects directly to the vertical and markets you're planning on targeting. A quick example: maybe your product will sell well in the healthcare industry, however, it will take 4 times as long to close deals vs selling to companies in the fin-tech market.
Yet another important factor is the perception of your brand.
* Do they know your brand?
* Do they like how your brand is presented?
* Do they trust your brand?
If someone doesn’t know, like, and trust you, they are not going to buy from you.
The importance of building brand consistency across your website, sales deck, and social media channels are easy ways to make it possible for customers to understand your brand.
While factors like product features, marketing, brand, competitors, and customer experience play essential roles, pricing is often the most direct way to influence product-market fit. The price point is the value exchange between your product and your customers' perceived worth. If the price is too high, potential customers may be deterred; if it's too low, they might question the quality or value.Here are some reasons why focusing on the right price point is crucial:
1. Perceived Value and Quality
Price sets an expectation of quality. A higher price often implies higher quality, while a lower price can raise questions about the product's worth. Striking the right balance ensures that customers feel they're getting their money's worth.
2. Competitive Edge
A well-considered price point can give you a competitive edge. It can position you as a premium, mid-range, or budget option in the market, helping you stand out from competitors.
3. Maximizing Revenue and Profitability
Finding the optimal price point allows you to maximize revenue. Too low a price might lead to a high volume of sales but lower profits. Conversely, too high a price could limit your customer base.
4. Customer Acquisition and Retention
The right price point can attract the right customers and increase customer retention. Customers who feel they've received value for their money are more likely to return.
Now that we understand the importance of pricing, let's delve into strategies to help you find the right price point for your product or service:
1. Market Research
Thorough market research is the foundation of effective pricing. Understand your target audience's preferences, their willingness to pay, and what they consider fair for the value you offer.
2. Value-Based Pricing
Consider the unique value your product brings to customers. Pricing should reflect this value, aligning with how much customers are willing to pay for the benefits they receive.
3. Competitor Analysis
Study your competitors' pricing strategies. This will give you insights into market norms and help you position your offering effectively.
4. Experimentation
Don't be afraid to test different price points. Conduct A/B tests or offer limited-time promotions to gauge customer response and gather valuable data.
5. Customer Feedback
Listen to your customers. Their feedback on pricing can be invaluable. Understand what they find reasonable and adjust accordingly.
6. Iterative Approach
Realize that finding the perfect price point is an ongoing process. As your business evolves and as market conditions change, be prepared to adjust your pricing strategy.
Focusing on the price point is a strategic move in achieving a strong product-market fit. It's not just about assigning a number to your product; it's about understanding the perceived value in the eyes of your customers. By conducting thorough research, considering value, and being open to experimentation, you can find the sweet spot that propels your business toward success.Remember, achieving price point product-market fit is not a one-time event. It's a dynamic state that requires constant attention and adjustment, and getting your pricing strategy right is a significant step in that journey.
