These series of guest posts are written by the teams attending the Tetuan Valley Startup School 2010 Fall edition. This post is from the automatify team, formed by Guillermo Arribas.
The main steps a startup should follow to avoid failure could be summarized as:
- develop a good enough product: execution
- market the product: is there a viable market?
- make money: pricing strategy
No surprise then that one of the most common question by software entrepreneurs is how to price their product.
The business model
The pricing strategy is a consequence of the startup business model, not the other way around. Choosing the right model is just the first step.
Advertising-based
Build an audience and monetize it with ads. In advertising-based businesses, there are two customers with different interests: the user and the advertiser.
Freemium
Service is given away for free with limited features, an enhanced version is offered to paying users. Customer acquisition cost must include the cost of acquiring free users.
Subscription-based
Recurring payments, paying lots of small amounts is psychologically easier than paying one large amount.
Pay-per-use
The per usage model involves charging users based on how often they use software, PaaS providers (cloud, messaging) tend to operate under this model.
Perpetual Licensing
A classic model in the traditional software industry, unusual for web applications.
Back to pricing
Before going any further, knowing the cost structure of the business is a must: fixed and variable costs, especially customer acquisition cost.
Don’t Just Roll The Dice , by Neil Davidson, is an in-depth guide to pricing specific to the software industry. Most common strategies are:
Competition-based pricing – Prices are based on prices of similar products, differentiation on at least on key feature is essential.
Cost-plus pricing – Dead simple, prices are set at production cost plus a markup.
Value based pricing – Prices based on the perceived value to the customer, usually the most profitable form of pricing.
Predatory pricing – Sell products at a loss, or give them for free. Many advertising-based and freemium businesses operate at a loss, their objective is to grow their user base.
Enter lean pricing
Product pricing is a tricky business, as much art as it is science. At some point, there is a need to make a decision and it is important to get it right.
Lean Startups create rapid prototypes to test market assumptions and use customer feedback to iterate. The same iterative and customer-centric process applied to engineering could be applied to pricing.
Lean pricing advocates the execution of pricing tests once an Minimum Viable Product is built in order to discover what early customers are willing to pay.
There is no other program of this kind in Spain, where there is a 
