11 Pricing Strategies for Startups Today

Ben Lim Business Model, Finance, Guides, Startup Fundamentals, Startups 2 Comments

Most Startups we meet have very similar pricing strategies. Here, I will attempt to detail the basic to advanced strategies used by some of the best Startups in Southeast Asia. Different strategies have different effects, so do use this as a guide to handling your sales & marketing challenges!

I will split these strategies into two main categories – one for Marketplace startups (supply and demand based) and one for SaaS Startups (Software as a Service). While these strategies are likely used by the respective business models, it does not mean that a Marketplace cannot use a SaaS pricing strategy and vice versa. I will not be covering any pricing strategies for traditional businesses like retail or service businesses.

Marketplace Pricing Strategies

Example Marketplace companies include Uber, Lazada, Foodpanda etc. These are companies who have a platform that caters to a Supply-side and a Demand-side – hence the term ‘marketplace’.

Decoy Pricing + Psychological Pricing

Psychological pricing similar or same products differently to drive sales for the cheaper product. McDonald’s does this with Value Meals in order to capture high margins with Coke and Fries (rumoured to be about 90% margins) as well as to reduce the ordering decision time to keep queues short and profits high. 

Time-Sensitive Pricing + Psychological Pricing

Psychological pricing that depends on the time a product or service may expire. This is often for event-based services or perishable goods where the price may be discounted closer to the end of the product or service life. For example, Lazada offers price cuts during festivities to create urgency in purchasing behaviour to drive sales up.

Dynamic Pricing + Profit maximisation

Dynamic pricing is pricing that changes according to demand and supply principles. Dynamic pricing is used by platforms like airlines or Startups like Uber to encourage or discourage transactions at different times. It should be noted, however, that Uber caps the lower end of dynamic pricing so that they can earn a minimum fee.

Loss Leader Pricing

Selling key products at a very low price (even below cost) to stimulate sales of other products. Some Startups like Dropbox or Google offer products like Gmail at a loss in order to tie in customers on other products like Google G Suite or other premium services.

SaaS Pricing Strategies

Example SaaS companies include Google, Zenefits, Spotify, etc. These are companies who sell subscription software services.

Skimming Pricing Strategy + Fixed Costs Coverage

Starting with a high price for early customers and lowering the price as you cover your investment costs. Often, Startups that could target higher-end clients early on would charge higher prices to cover development costs and then use that same software to sell to smaller players at a lower price.

Freemium Pricing + Switching Costs

Providing a product or service for free, and then charging for advanced features. A good example is Google G Suite which starts free until you want to upgrade the space & feature limitations. Users may find it hard to switch to another competitor due to high switching costs like having to move data and re-training.

High-Low Pricing + Psychological Pricing

Offering products at higher prices vs. competitors but offering discounts on key items to ensure the price is lower. Often, SaaS startups price similarly to competitors but apply a discount on yearly plans to compete in price and to secure stable cash flows and upfront cash-in-bank.

Limit Pricing + Barriers to Entry

Limit pricing the product below the competitors’ cost to enter the market to discourage their entry into the market. Usually only executed by successful Startups, costs would be optimised by the economics of scale and scope. Then, they would have additional margins to lower the price below the competitors’ costs and yet still make money for themselves.

 

Penetration Pricing + Branding

Mostly done by early stage Startups, penetration pricing means to start off at a heavy discount. These Startups would start off with pilot programs or heavy early-bird discounts to build up the trust of customers until they have a few big brand logos to show other customers.

Predatory Pricing + Monopolisation

This aggressive pricing strategy aims to drive out competitors and is illegal in some countries. A good example is Uber, which tried to drive out traditional Taxis and other competitors by offering services at a loss on each transaction. It is an unethical act from a Startup that aims to monopolise the market. In addition, it is also a dangerous act, as it requires a lot of cash to execute – and can cause complete business failure. See what I mean here: Uber Charity Business Model

Premium Pricing + Branding

An artificially high price that encourages positive brand perceptions from buyers. Often done by premium services, it tries to create a perception of higher reputation, prestige, quality, and desirability. 

Discrimination Pricing + Profit Maximisation

Price discrimination is to have different prices in different market segments or countries. This is to maximise profits in different segments. A good example is Spotify that sells the same subscription at different prices in different countries to ensure each country pays the most possible.

Value-based Pricing + Profit Maximisation

A pricing based on the value it creates for the customer. Some of the best Startups maximise value by charging less than the value they create for the customer, to ensure their pricing makes sense for their customers. For example, if your service saves or creates for your customer $100,000 a year, it is fair to charge $50k to $70k to justify them switching over including their switching costs.

Variable Pricing + Fixed Costs Coverage

Variable pricing based on unit economics like the number of users, usage time, transactions, etc. Often, this is coupled with a floor price to cover fixed costs like installation costs. For example, many SaaS Startups may charge something like $20 base fee plus $5 per user. 

What’s Next?

These pricing strategies are among those that I have observed serving over 2,000 Startups at NEXEA, our Startup Fund (SEA), Startup Accelerator (Malaysia) and Angel Investor Network. With these pricing strategies, I hope you can conquer your market and keep the competition at bay. If you found this interesting, do share so that others can learn too!

  • Kenny Wk Chin

    How about giving it free (freemium) and put advertisement when you have enough traffic or selling the data. What strategy is that? Also, please explain how does company like WhatsApp or (Instagram) get a $19 Billion valuation despite having 0 revenue and 0 ads

    • Hi Kenny, excellent & challenging question!

      Ads are part of the advertising business model. There is no price for customers technically, so that’s why it’s not in this article.

      What Instagram does is also part of the advertising model. See more here: https://www.feedough.com/how-does-instagram-make-money-instagram-revenue-model/

      As for Whatsapp, there is no business model currently unless Facebook ( who bought them) is using the user data to target their ads more effectively.

      Advertising platforms are worth a lot because they own the space where millions or billions of people can view those ads. For whatsapp, they were not valued based on advertising potential, but rather on a “what is it worth to Facebook” basis. How much would it cost Facebook to get the same data or userbase Whatsapp has on its own without buying Whatsapp? Apparently, about $19 billion or more. As long as Facebook can make more money with that information, it makes sense.