Deciding the right price to charge for your new product is difficult as you must estimate its value to customers. Most entrepreneurs under-price their product, trying to make a sale, which can lead to small, unsustainable margins. Here’s how to charge your first 5 customers, while maximizing your revenue.
1st Customer
Think of your 1st customer as a stepping stone to finding the right customers. You may want to offer your product for free in the early months because being live is more important than how the product is being used or whether the customer fits your expected profile. Wait at least 2 months before transitioning this customer from free to paid; but be prepared to offer up to 12 months of free service, given the number of product issues they will likely encounter.
Customer Profile:
Anyone willing to use your product in a live setting
(Note: This customer may not fit your expected profile).
Price:
Free.
When to ask for money:
2–12 months.
2nd & 3rd Customers
Once you know your product works, focus on the right customers to ensure you’re not being distracted by feedback from lower priority customers. Charge an extremely low amount at this stage, to understand how the sales process works with this customer profile. The low price should guarantee a potential customer is not deterred due to their budget. As these are still early customers, you should wait until they are reliant on the product or they want something new, before you ask for a more reasonable fee (usually after 3+ months).
Customer Profile:
Your expected customer profile.
Price:
At least $1.
When to ask for money:
Once customer expresses an interest in using your product live.
When the customer requests an upgrade or is reliant on your product, you can ask for more.
4th & 5th Customers
After proving you can sell to your customers, you can start raising prices to generate sustainable revenue. First, decide what you believe is a fair price for your service, based on the value it provides to customers and market research. Multiply that price by three and offer it to your 4th customer. Note that you can expect the customer to negotiate the price down, somewhat. Whatever price you agree to with Customer 4, triple it again for Customer 5. This approach will filter out customers who do not need your product now, leaving room for you to provide a premium service to customers who do want your product now because they will derive the most value. Remember, it’s easier to provide a premium service initially, then move down market on your pricing in the future.
Customer Profile:
Your expected customer profile.
Price:
Customer 4–3x what you think you should charge.
Customer 5–3x what you charged Customer 4.
When to ask for money:
Once customer expresses an interest in using your product live.
Pricing is a difficult process and many entrepreneurs hurt their business with extended low pricing and small margins. Once your product is being used, don’t be afraid to ask for money and to significantly increase your prices for each new customer.
This article is part of a series on Sales for Startups.
1. How to Incentivize your First Sales Leads (Templates Included)
2. How to Convert your First Leads to Customers
3. How to Get Pilot Customers to Pay
4. How to Charge Your First 5 Customers
5. Common Sales Mistakes by Founders
6. The Basics of Customer Success
Sterling Road invests in pre-seed B2B startups based in North America. Full process here: sterlingroad.com/process.
You can reach me here: ash@sterlingroad.com
Thanks to Kaego Rust for their help on this article.
Photo by Rajiv Perera
