Barcelona 2015

The elephant in the room:

pricing for digital products &
services
Product

UX/UI

Marketing

Tech

MarketInCloud

marketincloud.com
Industry

SaaS for the retail industry

Founders and team

Jos I. Merino, Founder and CEO.

Francisco J. Martnez, CTO.

The word marketing means many different things to

different people, especially for first time entrepreneurs. The four Ps defined by professor E. Jerome
McCarthy in the 1960s, also known as marketing
mix, continue to be used in academia and in the
business world to communicate the importance of
selling a product.
While startup founders often understand the importance of the Product itself, the way its Promoted and
where to Place (or distribute) it, they often overlook
the other main component of the marketing mix:
Price.
Setting the price of a product or service is not a trivial task, and will usually determine its appeal to consumers and how they perceive the value that a
startup might potentially provide to a business or
consumer. However, and despite the fact that there
are some rules entrepreneurs can follow to determine how much to charge for what they have created, pricing is as much an art as it is a science, one
that relies as much on marketing and psychology as
it does on classical economics, according to Silicon
Valley-based Venture Capital firm Sequoia Capital.
Its often the case that the early stage startups that
participate in Google Launchpad have somewhat
clear marketing strategies, but they often leave pricing for the end. This is a common problem that is
found across geographies and different business
models. A lot of startups treat pricing as a math
problem or, worse, an afterthought, writes Sequoia
Capital.

A good, but not sufficient, starting point to set the price of a

product or service is how much it costs a company to produce
it. The idea is that the actual price a product covers, at least,
the monetary value of the work, time and resources that are
put into the process.
Interesting readings on the subject

Pricing Your Product

The Sequoia Capital Guide to Pricing

How to price your startups product
right the first time

The Young Entrepreneur Council

How To Price and Sell Your Startups
Product

Redpoint - Tomasz Tunguz

The Psychology Behind SaaS Startup
Pricing

Gerry Claps
The Psychology Behind SaaS Startup
Pricing

Steven Dupree
4 Pricing Strategies for a SaaS startup
to increase conversion rate

Setalks

AJ Kumar, co-founder of Single Grain, published an article in

2012 offering the following tools and formula to determine the
minimum price a startup should charge:
Materials costs: the amount of money you spend on the raw
materials needed to create your products
Labor costs: the number of hours required to make your
product and the hourly rate associated with those hours
Overhead costs: any further expenses required for the operation of your business
Base Cost = Materials Cost + Labor Cost
Wholesale Cost = (Materials Cost + Labor Cost) * Wholesale
Markup
Retail Cost = Wholesale Cost * Retail Markup
Profit = (Retail Markup * Items Sold) Overhead Cost

However, cost should not be the only variable thats taken into
account when setting a price.
How to find the right price?
Founders will often set a price based on the cost of building
the product plus an estimated markup, when there's an alternative model that's actually better for businesses, (3) writes
Steve Blank. What you really want to think about is not just
your internal economics, but the customer insight that you actually have."
Price is a measure of value, and understanding how much
value a product or service provides to consumers or a business is key to determine how much to charge for it. As Blank
states in his book The Startup Owners Manual, and so does
Eric Ries in The Lean Startup, the process of pricing -and value assessment- should be integrated in the customer development flow, given that these are the parties that will ultimately, and hopefully, will buy your product.
A/B tests that validate certain pricing hypothesis should be run
with subsets of consumers, in order to find the right price to
charge. Intuition, and what other competitors charge, are also
aspects that should be taken into account when establishing
the price of a product or service.

 Deciding when to show the price of a product in

the purchase process can impact conversion
rates: In some cases, such as a takeout menu,
waiting until after a customer has already decided to buy your product may allow you to charge
more. In others, like a hotel room, too much
opaqueness can frustrate customers.

Sixteen Ventures

Many startups and entrepreneurs often continue

developing their product by adding multiple features before knowing how much to charge or
whether consumers would even pay for it. The gap
between the price of a product and how much value customers think it delivers, a concept known as
perceived value, should be the main focus of entrepreneurs in determining their pricing strategy.
Startups often operate in markets that have yet to
be created or fully developed, thus making it harder to follow previously established rules to set a
price. For many founding teams, pricing is one of
the most difficult and complex decisions for the
business, writes venture capitalist Tomasz Tunguz. Startups operate in newer markets where
pricing standards havent been set.
Pricing strategy considerations?
While theres no golden rule in terms of pricing
strategies, beyond the actual importance of customer insight, there are in fact several recommendations for entrepreneurs and early stage startups
that are in the process of setting a price for their
product.
Price as an indicator of quality: a price thats too
low might be perceived by a consumer as a lowquality product, and viceversa, affecting perception by the market
Launch softly with a high introductory price: its
easier to drop the price of a product than to increase it overtime
Different business models need different pricing
strategies: setting the price for a consumer app
is not the same as for a B2B or SaaS product
Free and freemium models drive growth at the
expense of short-term profitability

Prices are not forever: startups should review

their pricing strategy at least once a year, to reflect market changes and try to capture additional value. Phil Libin, founder of Evernote, once
said that if you picked your price once and never
changed it, its probably wrong.
Psychology affects purchases: the way prices
are displayed on your site (your best plan should
be in the middle), the number of choices, transmitting scarcity and many other facts might have
a big influence in the success of your product.
The case of Market In Cloud
Market In Cloud is a Cordoba, Spain-based startup
that participated in the last edition of Google
Launchpad, held in Barcelona in December 2015.
The startup has developed a business intelligence
product for Spanish offline retailers and distributors, with the main objective of making sense of all
the data they generate and, thus, increase sales
by allocating resources to the retailers products
and customers that could potential provide a higher value.
The company tried multiple approaches to define
its pricing strategy, including charging a commission per transaction, based on the number of
stores and other variables, but found no common
trait that defined its customers.
Market In Cloud came to Google Launchpad with a
well-defined product but not a clear go-to-market
or pricing strategy. The latter, as co-founder Jos
Ignacio Merino explains, remains somewhat true.
We dont have a defined pricing strategy, and
were still trying different approaches, including
taking a commission on each transaction, setting a
price based on the number of stores of retailers,
etc.
Market In Cloud targets retailers with multiple
stores, and starts at 150 per store. Some retailers are willing to pay a certain price, but weve
found that others are not, Merino explains.

By talking to existing and potential customers, the

company saw that the price companies were willing to pay varied significantly based on the industry
they operated in.
This has led the company to continue to evolve its
pricing strategy, which is currently based on adjusting the companys product and services to different
set of clients, as they have seen that, depending
on the vertical they operate in, businesses perception of value varies significantly.
We are currently tackling a very diverse market,
which means that finding the right price is not
easy, Merino says. A supermarket is very different from a fashion store, both in the way they perceive value and in their sales structure, and as a
consequence we are evolving our pricing strategy
on a continuous bases.
On top of that, Merino adds that theyve observed
that selling a SaaS product to traditional retailers
presents difficulties. Weve found that many traditional businesses dont want to pay a monthly fee
to access Market In Cloud, but they are indeed
willing to pay a significant set up fee, a monthly fee
that covers the cost of servers and additional money that covers support costs.