How should I price my startup product?

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A few weeks ago, I met with a founder who sells their product to medical systems. The founders still make up the company and have been selling their MVP for about $10 /month.

They have a good set of customers!

They have revenue!

They have yet to pay themselves.

And so we started discussing where that $10/month came from. It was just a shot in the dark - something to get started. That price point made no sense since the company is not a B2C startup. They needed to increase their pricing, but how much?

Pricing is a signal, and they were sending a bad one. How would they justify their price when they spoke to the managers and CIO/CTO types in charge of purchasing at mid-size and large medical systems?

So I told him one of the two stories I always tell about pricing, and I present it here to you.

Messing with Canva Magic Studio - “dinosaur reading a product review” Messing with Canva Magic Studio - “dinosaur reading a product review”

Back in my day… reviews meant something

After finishing graduate school in 2006, I worked at PowerReviews. At the time, my short description for it was “a review engine for e-commerce websites.” The company started during a time when only Amazon had product reviews, and so it was winning the SEO battle on Google and appearing at the top of results. Every other seller on the internet, including folks like Walmart, needed help figuring out what to do.

So PowerReviews says,

Add one line of JavaScript to your website, and suddenly, you can take reviews and show reviews for the products you are selling.

HUGE DEAL. And it worked! (This is still one of the best ideas I’ve ever heard and was why I jumped at joining when coming out of school. It just made sense.)

So it’s all rainbows and IPOs, right?

Well, this was such a good idea that another company started in Austin around the same time called BazaarVoice. The two were in direct competition, with the same promise: “You show reviews, more people buy, you make more money.”

One problem, though. There was no proof that reviews would lead to more sales. Retailers worried that reviews would lead to fewer sales as people trashed products and gave them low ratings.

After a year, Bazaarvoice released a whitepaper that showed the average star rating was 4.4/5.0, so basically, everything looked good once it had reviews. And there was indeed a lift in sales for those who implemented Bazaarvoice.

Side Note: This is a perfect example of what a whitepaper should do. Show the reader how they will get their ROI and help them remove their top reason to say no.

The race was on. The sales targets were the Internet Retailer Top 100 list. Amazon was #1. Everyone else needed a review engine.

How would customers choose?

PowerReviews had the best technical solution for reasons that don’t matter in this story.

PowerReviews and Bazaarvoice had some excellent initial clients thanks to friend networks and prior business partner relationships.

Both had sales teams made of folks who had worked in e-commerce before. They had rolodexes and would make the case.

Would we split the market?

Would our better technical solution win out?

One day, our engineering team is eating lunch around a table in our small office, and one of the sales guys walks in, and he’s steaming mad.

Can you believe it? Bazaarvoice is telling folks we’re going to go out of business!

So, about that startup business model

PowerReviews had a business model. There was a plan, and it went like this:

  1. retailer gets the review engine for free
  2. we get the reviews under a license
  3. we show all the products and all the reviews across all the retailers on our shopping portal
  4. we get to the top of search results
  5. consumers visit the portal, and when they decide to buy, we show them where
  6. they click on one of the retailer links, and we make affiliate revenue on the purchase

Affiliate marketing was still nascent, so this was a big deal! It made sense to us, and once we had the eyeballs (uh oh), it would make lots and lots of money.

The best part was the alignment of incentives: we made money when the retailer made money. So we wanted you to make more, and you would be happy to give us a cut.

Messing with Canva Magic Studio - “South Park underpants gnomes 1) product 2) ??? 3) profit!” Messing with Canva Magic Studio - “South Park underpants gnomes 1) product 2) ??? 3) profit!”

Our sales guy is fuming. He tells us what’s going on:

They’re telling everyone our business model won’t work!

Bazaarvoice’s story was that there was no way for us to get to scale and make enough money to survive as a company. Did the retailer expect us to build the #1 product review site online and earn enough affiliate revenue to grow and cover all expenses?

Let’s say that did happen. If PowerReviews pulls it off, the amount the retailer would pay in absolute dollars could be crazy as it scaled with revenue.

They went on.

How many employees are working on your website right now?How many will you need to build and maintain reviews on your site?

And then, the killer line: 

Wouldn’t you rather pay the low, low price of one engineer ($100k/year) and get a whole product team making best-in-class review software?

It’s a fair price. You know exactly how much you’re paying, and we’ll be around in two years.

I was just an engineer at this point, but I remember thinking:

Damn. That’s pretty good!

I may have said that out loud. I remember the sales guy going off again after that.

Pricing your startup’s product is hard!

Messing with Canva Magic Studio - anime style, telepathic message between two people of “pricing is a signal” Messing with Canva Magic Studio - anime style, telepathic message between two people of “pricing is a signal”

A year later, we launched our shopping portal and signed some good retailers!

But Bazaarvoice had taken the lead. They signed the top online retailers and were on their way to dominating the market.

Many other things happened, and many other strategic choices were made. But the end of this story is that Bazaarvoice went public and acquired PowerReviews a few years later. (The FTC found the merger was a monopoly and broke up the company in the “reviews” space, but whatever.)

I have a few takeaways from this story.

First, pricing is hard! The PowerReviews pricing model made sense and is a standard model today. You develop a product, drive revenue for your partners, and take a cut of revenue. And yet, it wasn’t the right solution at this particular time in this particular space. Company founders need to consider multiple pricing options and think about sustaining the company against potential competitors.

Second, pricing indicates value. Reviews bring higher sales, higher SEO, and higher trust. Why wouldn’t you pay for it? As a founder, your goal is to find a similar way to easily pitch ROI for your product.

Third, pricing is a signal. If it’s too low for your market, it may signal that you are not solving a critical problem or that you’re not a serious option. If it’s too high, you might mistakenly message that your startup product is meant only for huge enterprises, rich people, or even an entirely different problem. (The second story about pricing digs into this.)