Get customers now, monetize later. That’s been the mantra for most growth-stage companies who are convinced that the only way to build a customer base is to make things cheap or free.
But as many CapitalG portfolio companies have shown, monetization and growth don’t have to be a trade-off. In fact, prioritizing pricing can have a multiplier effect, creating a flywheel in which better monetization unlocks revenue that can be re-invested in additional growth.
In this article, you’ll learn how to take advantage of this often under-appreciated growth lever from key members of Alphabet’s Monetization & Pricing team, who advise CapitalG’s portfolio companies and set the monetization strategy for a wide range of Google products—from consumer hardware to advertising, enterprise licensing products, and early concepts from Google X.
Unlocking new growth potential through monetization
Growth, especially revenue growth, is becoming harder to come by, thanks to rising acquisition costs that don’t show any signs of slowing down.
A few reasons contribute to this. Markets are highly competitive, driven by easier access to capital and less barriers to start a business. That makes getting the right trade-off between user growth and revenue growth especially important.
Updating pricing can help in both the short and long-term. For most tech companies, monetization gains go directly to the bottom-line and can be reinvested into growth or to increase the company’s runway and financial sustainability. But as with all growth decisions, timing is everything.
Pricing adjustments are much easier in the early growth stage rather than later on when customers have gotten used to the way you charge (or don’t charge) for your products. Silicon Valley’s history is full of companies that waited too long to appropriately charge for its products, anchoring customers to unsustainable low pricing expectations, only to find it impossible to raise prices later.
When considering the right time to re-address pricing, consider the following questions:
- Do you have a variety of customer segments, but serve them all with the same product?
- Do you have a better product than competitors, but find it hard to charge a premium?
- Do you have more users on your free product than you like?
- Do you have very low (or very high) churn?
- Is your pricing strategy “set and forget”, based on decisions made long ago?
If you answer “yes” to one or more of these questions, it’s time to rethink pricing. And one way to do it and to quickly drive impact is to re-align the price with your customers’ willingness to pay.
Learn how much your customers are willing to pay
Customer value (and thus their willingness to pay) is at the core of value-based pricing.
For Alphabet and Google X projects, we typically conduct in-depth pricing surveys to test the willingness to pay for products and different packages, often using tools such as the Van Westendorp Price Sensitivity Model, Gabor-Granger, or conjoint analysis.
These tools work by asking your target customer group a series of questions to identify the optimal price range for your product or the revenue-optimizing price point. Using these tools, you can find the ideal price point even before launching a product and you can use tools like Google Surveys if you can not survey your customers directly.
Optimizing price using A/B testing
While surveying your audience is one effective way to find the revenue optimizing price, simple A/B-testing is often an efficient way to test different price points.
A CapitalG portfolio company in the consumer technology space was launching a new product but they weren’t sure how to price it. Their initial hypothesis was that a cheaper product would convert better on the front-end, so they were willing to price themselves significantly lower than their competitors — a strategy most startups default to.
Rather than launching at the low price, we advised them to set up a live A/B-Test for three very different price points — $10, $20 and $30.
While the team initially thought that charging $10 would optimize their customer acquisition, A/B testing showed that a higher price point did not have a drastic impact on the conversion rate. At a $30 price point, their realized revenue was 125% higher than at the $10 price point they originally planned for.
In fact, higher prices allowed the company to drive both growth and revenues.
Even though at first glance higher prices seemed to lead to a lower adoption (in the example: -8 new customers, with +$400 in revenues), because the average customer acquisition cost was $30, re-investing the $400 additional revenue, resulted in +12 customers, increasing both adoption and revenues.
What can you do to implement these learnings
For companies shifting from start-up to scale-up, pricing can be a powerful lever to drive both revenue and growth, while preparing your company for a more financially sustainable future.
Even simple tests that you can do in-house without pricing strategy expertise can lead to very strong impact.