Are you a founder or manager of a start-up? Synonymous with engaging in a diverse set of challenges involving strategic thinking, marketing, technology and a host of other things. So it can be tempting to neglect pricing. Yet customers' willingness to pay is one of the most important decision areas for your business. We reveal 6 reasons for this here.
1) Setting the price too high or too low will kill the business 🎯
You will never get off the ground if your price is too high, no matter how much work you do! Some sales may be possible due to your determination or other factors. However, if the price is too high in relation to the value you put out and the potential willingness of customers to pay, you will never get a significant sales volume. Similarly, you should avoid setting the price too low. Especially since the truth is that having too low a price is a much more recurring problem than the opposite. Often, start-ups set their prices too low to secure business negotiations. But this leads to a lack of profit, which hinders daily operations, growth, etc. Getting the price right for your product or service is therefore a key factor in your success!
2) The price defines your product or service 🙌
Buy a watch for 10€. Or buy a watch for 5000€. In the first case, the price seems (too) low. In the other, it seems (too) high. So, the prices companies put on their products or services define the kind of company they want to be and the perception they want consumers to have. If the watch in question was made from rough diamonds for 5000€, the price is not too high and many customers would therefore be willing to pay that price. It is essential to set prices in line with your company's positioning!
3) Price and willingness of customers to pay determine your competitiveness 🥇
If your price is £100 and your competitor's is £120, some might consider your solution to be competitive. However, if customers are willing to pay $150 for your competitor's solution and "only" $90 or $100 for yours, then indeed, your solution is not competitive. The competitor has a better ratio of customers' willingness to pay to the price for its proposal.
The above graph shows that the price curve does not follow the maximum willingness to pay (WTP) curve, revealing areas that are not optimized for the firm. The price should therefore be higher at point q* and lower at point q². Your alignment with consumers' willingness to pay is key when it comes to measuring your competitiveness!
4) Start-ups and scale-ups undervalue their offers by 30% 💸
Our experience has shown us that these companies want to minimize their risks through strategic and tacticalplans. Strategically by setting prices well below those of the market players, so that if nothing else works, clients decide, by default, in favour of the price of the start-up. Unfortunately, this situation becomes a self-fulfilling prophecy in which the only parameter the company plays on is its price. This is very rarely sustainable, since a new, more affordable offer will inevitably emerge.then tactically by wanting to offer multiple discounts to close a negotiation.💥 It is important for a company not to undervalue its offers so as not to get locked into a precarious strategy!
5) The knowledge related to willingness to pay helps in the development of your next products or services 📈
Most businesses don't just sell a product or service. So, when the research phase for the next one begins, what should the price of an extension or a new complementary product be? Many scale-ups make the mistake of adding new products simply by pricing them slightly higher than the original product. But maybe customers are willing to pay twice as much for the product extension since it can meet the customer's main need in half the time.💥 Knowledge about willingness to pay can also help in understanding the relationships between the different products on offer and how to set optimal prices!
6) The price in your home market is not the best when you sell in another country 🌎
Many scale-ups are looking for external investment to expand into new markets. Logical you may say? However, a common mistake is to assume that because a product is successful in the home market, where it sells for $100, it is enough to convert $100 into dollars to launch it in the US. What if American consumers are willing to pay $80? In the first case, the company gives up a considerable profit. In another case, the product is too expensive and the launch will most likely fail. Let's take the example of the famous Big Mac Index, on the chart below. The price of a big mac differs from country to country. This is explained by the difference in purchasing power that impacts the willingness of customers to pay for a given price.
💥 The price of a product or service is to be reviewed at each introduction on a new market!
You now have the keys to understanding the importance of your customers' willingness to pay. You are now looking for a tool to calculate your customers' willingness to pay and to help you set the optimal price for your products or services? KlackThe first collaborative pricing platform is specialized in this. Find it right here:
