Why Small Business Needs to Rethink Pricing Strategies and the Lean Startup Model

Growing a profitable business is tricky. You start out with a great idea but how do you take it from there? In a recent interview, my guest Lisa Hendrickson (founder of Spark City), shed light on some of the many complex decisions small business owners have to make. Her insights will make you take a second look at your pricing strategies and your approach to the lean startup method of growing your business.

Lisa is a serial entrepreneur who has spent most of her career in startups. Her last company, HCC, was ranked as one of the fastest-growing inner city companies in America and won her several awards for growth and innovation. In creating Spark City, she wanted to create a company that could help small- and medium-sized businesses achieve the same kind of results.

Spark City helps small business owners with things such as how to develop the right pricing strategies, how to make good business decisions based on your numbers, and how to build a great company. In our discussion, we touched on these topics and more. Lisa’s insights are sure to provide food for thought as you strive to grow your own profitable small business.

Pricing Strategies: 3 Key Mistakes to Avoid

Pricing strategy is one area where Lisa sees small business owners making mistakes that could literally devastate their business. She admits that pricing is complex, but urges you to avoid these huge mistakes.

Mistake #1 – Over-Simplified Pricing Strategies

Some business owners think pricing strategy just boils down to “I bought this for $1, so I’m going to charge $3.” It’s much more complex than that. Pricing strategy includes a lot of variables. You have to look at every little piece to get an idea of the big picture and how much you should charge. That includes the costs for every item in the product as well as things like overhead, labor, equipment, rent, and more. Pricing strategy also has to take into account your time and the value that you are offering. These variables are different for everyone (for example, overhead in New York City is very different from overhead in Kansas City!) so you have to focus on your own specific numbers.

Mistake #2 – Forgetting About the Customer

Many business owners forget about the customer in their pricing strategy. The price you set has to take into account what you know about your customer – what they want, their pain points, and how price factors into the customer’s buying decision. For example, in the luxury market, if a product is too inexpensive, it is deemed untrustworthy; however, when dealing with people who have less disposable income, the importance of price increases. As Lisa mentions, “We need to understand who we are selling to because if we do, then we have a better idea about positioning our product in the marketplace so that we can speak appropriately to buyers.”

Mistake #3 – Competitor-Based Pricing Strategies

A final common mistake in pricing strategies is that small business owners often look at their competitors, saying that “if the competitors are charging $X then I have to charge the same.” Matching somebody else’s numbers is not the way to go. You have to believe that there is something unique and wonderful about your business which customers can’t get elsewhere. Competitor-based pricing strategies don’t work because “When we take our pricing cues only from the competition, it means that the competition is actually telling us how much money we can make.”

The Lean Startup Model – A Cautionary Tale

In our discussion, Lisa also gave her opinion on the lean startup model of starting a business. As she mentions, lean startup actually started as an idea of Steve Blank from Stanford as an alternative to the business plan model. The idea is that a business plan can help you get funding, but it doesn’t actually help you get your products to market. The lean startup model promotes a different method where you refocus your thinking on answering a number of crucial questions, such as:

  • What are the top three problems that your customers are having?
  • What is your unique selling position?
  • What are the costs associated with starting up your products?
  • What are your revenue streams?

By answering these questions, a company can create a minimum viable product (MVP) and bring it to market fast. The company then goes through various iterations of the product based on customer feedback.

There is currently a huge movement for the lean startup and MVP model, especially in IT, software, and internet companies. Although Lisa recognizes that it is a great model to get your business going quickly, she cautions that a focus on lean startup can be risky.

Business owners using lean startup often focus exclusively on product building while ignoring the fact that they also need to build a great company. As a society, we move through products at an alarming rate. Remember when everyone wanted a PalmPilot? How about when BlackBerry was all the rage? Products come and go quickly; great companies stand the test of time.

As Lisa puts it:

What the missing part is for most people is: how do we make a great company? How do we build something worthwhile? How do we have something that has long-term value? Because when we continue to focus on product, product, product, solely, it means that all of our eggs are in the product basket rather than in the company basket.

To create a great company you have to focus on making the right business decisions at each important pivot moment. It means building the right processes, infrastructure, and team that will help you succeed.

I urge you to listen to the interview in full so you can get all of Lisa’s advice on pricing strategies, lean startup, and growing your business. You can also check out Lisa’s video series on Inc.com, and she has extended a warm invitation to answer your other pricing strategy questions by connecting with her on Twitter or LinkedIn.

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