This column is by Tomasz Tunguz, venture capitalist at Redpoint
What is the optimal pricing strategy for a start up? That depends. It depends on at least three other variables: the product, the placement, the positioning. Combined with price, these are the four 4Ps of marketing created by Dr. E. Jerome McCarthy, former professor of marketing at Michigan State and Notre Dame. Also called the marketing mix, these four variables need to be aligned when determining pricing for your startup.
Apple serves as a great example of a company whose marketing mix is aligned and consistent. The company positions itself in the market as a premium brand. It builds products of the highest quality often with innovative and novel manufacturing techniques. Apple sells its products in glorious, well lit and modern stores. And it’s price points top the market.
The same idea holds in SaaS. A bottoms up company like Expensify requires a different marketing mix than a premium software company like Workday.
Price – Expensify employs a penetration pricing plan, using freemium strategy to build groundswell within organizations and ultimately close the entire company as a customer.
Product – The product is built with this strategy in mind, and differentiates itself in the market with the friendliest user experience in the market, which is how the product will initially be evaluated by these ultimate evangelists.
Placement – Expensify distributes its applications in the places these consumers will look for them, namely mobile app stores.
Positioning – Expensify markets itself as an irreverent brand, a marketing message that resonates with the individual users who in a sense ‘rebel’ and choose a different expense management product.
We cannot set price in a vacuum. The pricing strategy has to reflect the strategy of the three other components in the marketing mix. A premium price point slapped on product with a bargain positioning won’t work. Customers will be confused.
As startups scale and address incremental customer segments, the marketing mix becomes more complex. When a startup moves from serving the SMB segment to the midmarket to the enterprise, messaging must change because enterprise buyers care about different things including security, large user base management, compliance and other features that small to medium businesses never consider.
If a startup decides to sell their product through a channel partner in addition to their direct sales team, they add another layer of complexity. They must market a product through another organization, change the pricing model for that channel partner, and explain to the market when to buy directly and went to buy through the channel partner, in order to assure the partner’s success.
In addition to all the changes within the company the ecosystem evolves as well. A new premium entrant might enter the market, changing the market dynamics, forcing incumbents to respond and change their 4Ps. The iPhone 6S was released after Samsung’s phablet success, for example.
There are no simple answers when it comes to marketing mix. There are many different factors to consider, but a framework like the 4Ps can help prioritize the discussion.
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Image Credit: Groupon