Notes from week 3 of Startup School W2020

This article will contain my notes for the third week of Startup School 2020. Startup School is a free online course for founders actively pursuing their own startup.

Startup Pricing 101

The Actual video that I took notes of:

Background

A startup needs acquisition of new clients. If we increase our efforts / resources by 1% to work on acquisition, we’d get a return about 3.2%

It also needs retention of existing customers. If we increase our efforts / resources by 1% to work on retention, we’d get a return of about 6.71%

It also needs monetization(more $/customer). If we increase our efforts / resources by 1% to work on monetisation, we’d get a return of about 12.7%

^^ The above data was taken from a survey of about 500 Software as a service startups. we can clearly see that monetisation has more output than others, but still a lot of startups fear to touch the pricing.

Price Thermostat

The price thermometer is something like this(screenshot taken from actual video)

The gap from the cost to price is the incentive to sell. The gap from price to value is the incentive to buy for customers. We can either price based on cost or value. But it is highly suggested to price based on value. For people who don’t know the main things of price, They usually make one or more of the 4 mistakes: The four mistakes are:

• Pricing too low
• Underestimating costs
• Not understanding the value of either customer or us
• Focus on wrong customers

5 Different Stages of a startup

A startup has 5 different stages:

• Product development
• Introduction
• Growth
• Maturity
• Decline

All of them have different profits/losses over time. A reference chart is provided below. Studies shows that demand does not accelerate until the first 2% to 5% of potential buyers adopt the product. The customers who are the first 2% to 5% buyers are early adopters. What it means is that, In the first two stages, we can’t have mainstream customers like the other stages because we don’t have mature customers, we only have early adopters.

The reference chart is screenshot from actual video.

Pricing Innovation

Pricing innovation is very hard mainly because:

• Innovation requires user to change patterns
• Average user lacks knowledge and trust to make the leap
• Early adopters are the only people to place high value on potential benefits

Price optimisation is basically the baseline of how much we charge and how much sales we get. We’d also get to know acquisition strategy if we optimise price. Eventually, Pricing optimisation will lead to pricing innovation. To optimise price, we just need to try out different prices and write down:

• Price
• conversion rate
• sales volume
• Revenue

After we write it down, we could just choose what’s the best.

Rules Of Thumb for Pricing

$1B Formula

The "$1B" formula is all about multiplying price with customers that equal to$100 Million in revenue per year. This formula allows us to see if we are in consumer space or enterprise space. The whole pricing can fit into a quadrant of High price, low price and high complexity, low complexity. It’s a danger zone if we’re on the quadrant between low price and high complexity.

10 _ 5 _ 20 Rule

We often misunderstand the value that customers have. This rule helps us to find that approximate value. value = 10 * price. If we’re in the enterprise market, we could raise 5% of our price if we’re confident with it. The raise could happen until there is 20% of loss of customers and that’s pretty a good balance to have.

How to set KPIs and Goals

KPI means key performance indicator. KPIs are a set of quantitative metrics on how healthy our startup is. Setting the right KPIs and goals will let us know if we’re doing good or bad. The two kinds of KPIs are primary and secondary.

Good Primary KPIs

The characteristics of good KPIs are that they:

• Represent delivery of real value of product
• Can get captured recurrently
• should be used as feedback mechanism

An example of good KPI is monthly recurring revenue. Because they represent the delivery of real value, can be captured easily and it is usable as a feedback mechanism. Users spent per week is also a good metric. For Uber, the primary metric could be the number of trips.

Good Secondary KPI

Mmost of our metrics will be based on revenue, time, and customers. Secondary metrics exist only to tell the whole story. A few secondary metrics are

• Retention of customers
• Email conversion
• Burn rate

Having both king of metrics to measure would be useful to get at least 90% of the story. If we haven’t launched yet, it’s good to at least define metrics we want to track so that we could towards those metrics.

Goals

We could set a weekly increment goal that’s visible from our tracking of KPI. For ex: Every week, we want to increase 10% of our customers. Our goals should be ambitious and achievable. Our growth could be organic or paid. Every week, we need to stack up on ideas for growth next week. It’s completely okay to miss the goals for two weeks in a row as long as we understand why we didn’t hit the goal.