In 2016 Classpass was riding high, the company had recently raised $30 million in funding and was expanding into new markets at a fast pace. Customers liked the company's unlimited plan which let members attend a variety of workout classes at no extra fee.
But Classpass isn't alone among companies that have had to experiment with various pricing models until landing on one that works. Netflix, Dropbox, Uber and dozens of others have all raised prices, and have then been criticized by customers and pundits.
Pricing is a critical component of business success. If you are able to nail it, pricing can fuel growth in ways that few other things can. If you fail to find the right price, you'll end up either scaring prospective customers away or digging your business into a deep hole, with few ways to escape from crushing debt.
How should founders and small business leaders approach the pricing problem? Here are a few rules of thumb:
Price low to build a massive audience.
The venture capitalist approach to pricing often entails pricing products or services much lower than you can sustain in the long run. It's no coincidence that large consumer facing tech companies have had to consistently raise pricing over time. The aforementioned Netflix, Dropbox, Uber, and others adopted pricing strategies that were low enough to quickly attract new users.
But because the prices are low, companies can't afford to operate with heavy losses for too long. That's where price increases come in.
The 'price low to build big' strategy has a long track record of working, so long you're well funded through investment or debt financing. One of the keys to success with this pricing model is insuring you're able to accurately forecast burn rate. Otherwise, you'll end up running out of capital too quickly, making it harder to properly serve customers.
Learn how customers perceive the value of your product or service.
During an interview with Reid Hoffman on the Masters of Scale podcast, Classpass founder Payal Kadakia said she and her team stumbled upon the pricing model that would propel her company to scale.
What started out as a 30-day free trial offering access to an unlimited number of classes became the company's most popular subscription.
Customers felt the unlimited plan offered more value than Classpass anticipated. This is a perfect example of why you need to understand how prospects perceive value. It's often contrary to what you anticipate.
This is one reason why per-user pricing is usually effective. Presumably, each user gets a unique value from the platform. The more users on the platform, the more valuable it is for the entire organization.
Slack and Salesforce are two examples of companies that have successfully aligned pricing with perceived value using a per-user model.
Incentivize product adoption and expansion.
Pricing should incentivize product adoption, rather than stymie it. Avoid pricing models that discourage customers from spending more time using your product. Instead, focus on pricing that is as aligned with perceived value as possible.
Trello offers a good example of a well-aligned pricing model. The freemium task management platform lets users create an unlimited number of projects. It even allows users to use one integration for free, which helps users to understand how integrations can be valuable for them. To get unlimited integrations, Trello charges a small monthly fee per user.
Evaluate pricing strategy on a rolling basis.
Your pricing strategy will need to change depending on factors like customer acquisition cost, cost to serve, and customer lifetime value. It'll also need to change based on how prospects perceive the value of your product.
It's up to you to regularly re-evaluate your pricing strategy based on two criteria. First, does your pricing model let your business operate sustainably? If not, do you have the capital available to fund your business for the foreseeable future?
Second, is your pricing model helping your organization grow? In other words, is pricing aligned with the value people associate with your product?
To answer these questions you'll need access to company data, and customer sentiment. The first can easily be done through a number of business intelligence tools, and second can be done through customer interviews and sales call recordings.
There's a reason why big brands invest millions of dollars studying consumer psychology each year. It's because brands realize the importance of appropriately pricing products based on perceived value.
Pricing can be a competitive edge that fuels your organization's growth, and that makes life harder for the competition. To do it right, offer your products or services inexpensively to scale your business quickly. Then, evaluate whether your current prices are appropriate based on metrics and customer perception.