Should Your Startup Differentiate On Pricing?


This post is by Tomasz Tunguz from Tomasz Tunguz


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Startups are innovation machines. They identify market opportunities, develop novel products and go out to change the world. Some companies want to change the world in one dimension: a better product or a disruptive go-to-market. Others want to innovate in every dimension and re-invent every discipline from pricing to marketing to support to customer success.

Brad Birnbaum, founder and CEO of Kustomer, discussed the challenges of innovating on two dimensions simultaneously on the [Saastr podcast](). Kustomer’s platform is a fundamental re-architecture of customer support software. That product innovation is novel and differentiated in the market. At the outset, Brad also sought to change the pricing model.

So pricing’s a really difficult thing, right? It’s something that we wrestled with in the earliest days of Kustomer. We wanted to be innovative. We thought innovator pricing would be very important to us. We quickly learned as we started talking to customers they didn’t want innovative pricing. They wanted repeatable, consistent pricing that mapped to the budget they already had in place.

Now as we are going mid-market and above, we’re mostly replacing existing solutions, whether it be Zendesk or Salesforce. So they already had a budget in place, so they just said, “Hey, we have X amount allocated for a solution. Our solution is better, it’s robust, it does more, but this is the budget that we have.”

So they wanted a pricing model that, frankly, mapped to the way they’re accustomed to doing business It was highly predictable. So while we wanted to think about doing a consumption model here at Kustomer, because we thought that was innovative, we realized our customers didn’t want a consumption model.

Innovating in one dimension is already a challenge. You need to find customers who want it. Then you must hire the team who believes in it and can execute the plan. That’s hard enough. In Kustomer’s case, the product evolution is a hit and the company is achieving hypergrowth.

But customers wanted the better product with the same pricing framework as the rest of the industry. Pricing and budget aren’t the customers’ pain point. Access to data and efficiency are.

Innovating in many dimensions can slow sales cycles. If you have to describe first how your product is different and then educate your buyer on why the pricing is different, you may be hindering your champion, especially if the buyer doesn’t need innovation in pricing. Prioritizing how to differentiate in the market is a key aspect of product management.

There are spaces where pricing innovation is welcome, especially when there is a large, expensive incumbent. In that case, a lower cost, less expensive competitor with a new pricing model may be highly disruptive. You’ll hear customers will complain about cost openly and may contort themselves to save money by reducing usage. Before changing pricing models, listen to customer perspectives on budget.