Pricing power or market power is the ability of a startup to raise prices over time. A startup gains pricing power when it creates tremendous value for its users and defend its products from the threat of substitutes and new entrants. The second component is equally critical to sustaining pricing power as the first.
Recently, Simon-Kucher Partners surveyed companies across 50 countries for their Global Pricing Study. Only 1⁄3 of respondents believed their companies had a high level of pricing power. Does your business? In Zero to One, Peter Thiel professes the same concept: founders should aim to create monopolies. Monopolistic companies have ultimate pricing power.
All of these concepts of pricing, pricing power, value and defensibly contribute to finding product/market fit and eventually sustainability. True product market fit should be lasting and enduring product market fit. That means creating disproportionate value for users and buyers of software over time. So the startup can charge more and more for its product as the product improves broadens and is used by increasingly notable customers.
Pricing evolves as the market changes with the entry of substitutes and threats. Pricing evolves as a startup’s product matures, its brand solidifies and its team coheres. Because of all these conflating factors, pricing discovery is a challenging, ongoing process. The optimal price to charge is a function of the value the product creates and the leverage the business has within the ecosystem. When experimenting with price, two questions matter. First, the relative pricing question: how much are you willing to pay relative to a comparable product? Second, what do our customers’ reactions to our pricing changes imply about our business’ sustainability and pricing power? Consequently, what are the implications for our startup’s strategy?
Transient product market fit, often can manifest as first-mover advantage. The first company to create a category, define a new product, bring a new technology to a market, or exploit a novel distribution strategy does have short-term pricing power. But without a strong defense, it may be the last mover that wins the race. Startups need a competitive defense push.
Finally, the single most important business decision in evaluating a business is pricing power. Quoting Thiel again, “Microsoft was the last operating system and Google was the last search engine.”