In the race to close deals, hit targets and prove your market value, often being ‘cheap’ is viewed as a short-term springboard for traction.
But sometimes, dropping price is not the answer to quick traction.
You get the wrong kind of traction.
- Not all conversion is equal. Cheap might mean churn.
- B2B firms with a <$10 ARPC have a 6.72% churn rate, vs a churn rate of 4.76% for those $100 – $250 ARPC.
- Your goal is to “get customers in and using it.”
- But a free user is typically worth 15-25% as much as a premium subscriber over their lifetime, driven by referrals.
- This could be an inefficient and unpredictable way to drive revenue.
Cheap is not equal to value.
- It’s not a win-win. You leave money on the table, spend 10x as much time hunting 10x more customers, and the customer is less likely to get value.
- Negotiation is easy and stakeholder sign-off is swift compared to if you were 10x the price. But at what cost?
- Not proving the ROI of a higher price-point fails to create real demand. You’ve created disbelief that the product is really worth it.
- The decision becomes “why not” rather than a fundamental change to practise and process.
- This limits usage and stickiness. It’s difficult to claw your way back from the low anchor point you set.
There is sometimes a role for a cheap-entry point
- When you know your value driver, and you price to this. This might mean you are initially cheap. SalesForce is cheap at the entry-point, but an increase in users is in theory an increase in revenue for the client, making scalability work.
- When you know the nuances of a happy customer. In-depth customer segmentation will dictate necessary retention and up-sell practises. If you provide the same service and up-sell strategy to all customer types, cheap probably means churn. New Relic put their land-and-expand success down to this, despite a ‘price for penetration’ strategy.
- When everything else is equal in an unsaturated market. But if the market is hugely fragmented, the race-to-the-bottom will quickly set in. Differentiation must be sought out in some other way.