What pricing models are there for startups launching new businesses and products?
How should you price your product or service? How do you arrive at that number? What might the challenges be?
There are a variety of pricing models and strategies available to entrepreneurs today and how they end up showcasing those on their business plan. We’ll probably see more emerge in the future too.
Pricing can be everything in business. You can rise or fail on pricing alone. Early initial pricing can seem like the biggest challenge now. Yet, be cautious about plans to change pricing later. It could bring everything crashing down around you.
Here are some of the most common pricing models explained.
The freemium model exploded in popularity with LinkedIn and Dropbox. Sometimes it works for a while. It can certainly work long enough for startup founders to get into hyper-growth mode, acquire millions of free users, and then pull off a grand exit through a high priced acquisition or IPO.
We may not yet have seen this model fully tested for sustainability. It will typically require some substantial startup fundraising to cover upfront losses and customer acquisition. You had better really do the math and be accurate on your assumptions on how many users will convert to premium paid pricing. At least if you may need to hunker down and rely on being profitable during a downturn.
It’s no secret that many Google Drive, Dropbox and LinkedIn users will never choose to pay for anything. They will jump ship before paying anything. When COVID-19 hit, we also saw some of these companies which went public performing very poorly.
Dropbox and Upwork are two which saw their stock prices plummet into dangerous territory, despite being some of the few companies which should have been best positioned to thrive with more remote work happening.
This business model is all about offering the base product for free, with a premium, paid upgrade.
Many startups are riding on being cheaper than the competition. This price war mentality rarely works out. It often creates a race to the bottom, with only the largest and best-funded companies able to weather the battle and come out on the other side with a virtual monopoly.
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