Nothing is more critical to a growing startup than pricing strategy, and all too often startups leave too much money on the table by not charging enough which makes it difficult to take full advantage of the new value their product creates. As Marc Andreessen recently said, if he could put one phrase on a billboard in Silicon Valley it would be 'raise prices.'
My hypothesis on why startups currently have an issue with pricing is the recent (but now seemingly over) period of apathy towards negative margin growth. It conditioned startups to capture as much of a market as possible without thinking deeply, or at all, about pricing. While this gets a product into the hands of users, it does leave open the question of what buyers are willing to pay for it.
To answer this question, it's useful to turn to Econ 101's first lesson - supply and demand - and more specifically, consumer surplus. Why is consumer surplus good? For one, you always want your customers to feel as though they are getting a deal. More importantly, it's becomes possible to leverage that feeling to push out the demand curve for the core product, which is what any business really wants to accomplish.
While perhaps unintuitive, one of the best ways to do this is by 'giving away' complementary products or features. The result pushes out the demand curve for the core product, selling more at a higher price, while simultaneously increasing the consumer's perceived value (consumer surplus).
Let's take a look at this concept in practice in two of the most popular technology business models: Enterprise SaaS and Marketplaces.
Finally, it's important to address the 800 lb. gorilla in the room: Amazon Prime. Amazon has leveraged discounts on services that may seem arbitrary but actually create a large consumer surplus for the core product. Let's take a look at a few of the discounts offered to Prime members on ancillary services.
Amazon Music Unlimited: $9.99 non-prime / $7.99 Prime
Amazon Digital Storage: (100 GB): $11.99 non-prime / 5GB and all photos free for Prime
Amazon Audible Channels: $60 non-prime / free with Prime
By including discounts on these complementary goods, Amazon has increased the demand (i.e. pushed out the curve) for Prime. Furthermore, the consumer surplus created by including these complementary goods is less than the increase in unit marginal cost for Prime's main service, faster shipping.
The next time you are thinking about your product pricing strategy, take it from these tech behemoths: it's not only what you charge, it's what you give away too.
Special credit to Jonathan Crowder for helping me think through this post.