The price is right – is your startup on the money when it comes to cost structure?15 April 2018 Category:
Pricing is everything for startups.
Nowhere is the issue of pricing more important than the UAE, home of some of the most exciting and highest-stake new ventures on the planet. Startups in the country secured USD 400m in investments in 2017, cementing its position as the leader in the region for investment in new enterprises, according to the first MENA Annual Venture Report.
And some of these ventures could be hugely influential. Of the 100 startups pinpointed by the World Economic Forum to shape the fourth industrial revolution, 27 are from the UAE.
There is no reason why your startup couldn’t be among them one day – if you get your pricing strategy right.
But why do we say this? Why is it so important?
A question of survival
One of the biggest challenges startups face is how to implement pricing strategies to gain a foothold in the market, drive sales and eventually generate profit.
What makes pricing so vital, and difficult, is the fact it determines your market position, whether your customers buy from you and whether you can provide the level of service required by those customers. Setting prices too low or too high can have a significant impact on brand perception and market share, and may result in far less sales or profit than anticipated.
Setting prices too low or too high can have a significant impact on brand perception and market share, and may result in far less sales or profit than anticipated.
You would think, then, that something as fundamental as pricing, or costing structure, would be the one thing that entrepreneurs would be determined to get right from the outset – especially here in the UAE where startups and SMEs account for 95% of all enterprises. But this is clearly not always the case: a report by CB Insights found that 18% of startup failure was down to cost or pricing issues.
Could it be that entrepreneurs are simply too tied up with the administrative side of setting up in business that they overlook the basics? Or is it a question of misunderstanding just how important pricing strategy is, and the need to amend this strategy if it’s not going in the right direction?
To shed some light on this, and to help entrepreneurs hit the ground running, here is a step-by-step guide to getting your pricing strategy right from day one:
1. Don’t get side-tracked: The UAE is clearly a great place to do business, thanks to its diverse population, versatile banking products and strong financial support services. But the technical, administrative and financial aspects of setting up a business in the UAE are, let’s face it, daunting. The cost and time involved in obtaining a licence and registering with the government, for example, could easily lead entrepreneurs away from focusing on pricing and business goals. That’s why it can be so valuable to seek help from an independent company formation specialist.
Data from the World Bank’s 2018 Doing Business report, which provides objective measures of business regulations for local firms in 190 economies, appears to back this up. The report rates the UAE in credible 21st place for ease of doing business but only 51st for starting a business, indicating improvements could be made to relieve the administrative and financial burden of creating a new enterprise.
But there’s far more to it than that. Even when pricing is at the forefront of an entrepreneur’s thoughts, putting ideas into practice and implementing an effective strategy from the outset is more difficult than many believe.
2. Know your target audience and market: Who are your potential customers and what will persuade them to use your product or service? This depends on the perceived and real value that your offerings bring. One of the most common pricing mistakes startups make is basing their prices on cost, rather than customers’ perception of value.
In his book, The Psychology of Price: How to Use Price to Increase Demand, Profit and Customer Satisfaction, Leigh Caldwell argues that every product or services benefit can be seen as something deeper. The taste of a drink for example may be sweet but it may also provide memories of the past. He says every benefit can be broken down into the emotional drives of pleasure and pain, and the material factors of time and money. His analysis demonstrates pricing isn’t black and white. It involves a deep understanding of customer preferences and their reasons for engaging.
To know your audiences, you need to know your market. Be sure to conduct a thorough market evaluation of your customers’ values and priorities – and never forget to profile the pricing models of your competitors.
To know your audiences, you need to know your market.
3. Choose a pricing strategy: Remember that price and value are in a constant state of flux. Author Hermann Simon, who advises Fortune 500 executives, says pricing is ‘where value and money meet’. In his book, Confessions of the Pricing Man: How Price Affects Everything, Simon recalls his first lesson about costing was at a farmer’s market where sellers were at the mercy of the local cooperative that cleared the transaction. The farmers had no influence on price. This taught him a painful lesson: ‘Never run a business in which you have no influence on the prices you charge.’
Simon’s experience begs the question, how much influence can you really have on price? And if you do have influence, how can you use it to your advantage? This is where the all-important pricing strategy comes in.
Let’s look at some of the more common strategies:
Maximisation: It’s important to differentiate between sales maximisation and profit maximisation. Sales maximisation is about setting prices to generate as much revenue as possible. Profit maximisation, on the other hand, aims to generate the highest net profit over time. The latter works well as a longer-term strategy.
Premium pricing: This is where prices are set higher than competitors’. It often works best for luxury or unusual goods or services, and those where the seller wants to give the impression of better quality. Marketing techniques help to shape the customers’ perception of value.
Penetration pricing: Often used by startups with more funding behind them, this involves setting low prices to gain a foothold in the market and draw consumers away from the competition. It can result in loss of profits initially. Prices are then raised after developing broad adoption.
Price skimming: Prices are set high at the beginning to maximise profits from early adopters. As more competitors enter the market, the price is dropped to attract more price-conscious customers. This can be seen in the smartphone market, where new models are priced high and then come down in value as they are replaced by the latest version.
Price anchoring: Widely used in the retail sector, anchoring is when a business places premium goods and services near standard options to give the impression that the standard option is a bargain.
Psychology pricing: Here, prices are set at important psychological levels such as 99p to make the product appear cheaper. It can work both ways. Some companies charge the exact price, such as £80, to give the impression of quality.
The strategy you choose should be governed by a number of factors: the value of your product or services from the customers’ perspective; comparison with your competitors’ products and services; how your typical target market customers behave; your brand image; and your backing.
4: Keep your pricing fine-tuned
Lastly, bear in mind that many startups come unstuck if they fail to adapt when things begin to go pear-shaped. Fine-tuning your pricing strategy could save your business from going under when things get tough. Market conditions change, as do customer preferences. Therefore your pricing strategy shouldn’t be set in stone. It should be constantly tweaked to meet your business goals.
Fine-tuning your pricing strategy could save your business from going under when things get tough.
Furthermore, you shouldn’t be afraid to get your pricing wrong to start with – as long as you know how to correct it. According to Justin Longenecker in Small Business Management: Launching and Growing Entrepreneurial Ventures, ‘Small firms should not treat bad pricing decisions as uncorrectable mistakes. Remember, pricing is not an exact science. If the initial price appears to be off target, make any necessary adjustments and keep on selling.’ This is why it’s vital, as mentioned above, to maintain control over your pricing.
One final point: don’t forget to get expert support when you need it most. It will help you focus on running the business the way you want.
Setting up your own business has never been easier. Virtuzone takes care of it all so you can focus on what matters – building your business. For more information about company formation in the UAE mainland or free zones, please call us on +971 4 457 8200, send an email to firstname.lastname@example.org, or click here.