The first time I heard the concept – Price for Market Capitalization – was from a close friend of mine, Brent Bilger. Brent has been involved with start-up companies for over 20 years with his fingers in many successes. Like most great ideas, once you hear this concept it seems obvious, but I didn’t think of it until Brent did.
As we’ve discussed previously, pricing must follow your corporate strategy. The CEO defines the company strategy and the rest of the company, including the pricing team, follow suit. Almost all companies select a strategy with the goal of maximizing their market capitalization. In large companies, the strategy has been well enough defined and passed down to marketing and pricing that they don’t think about market cap, instead they think about executing the strategy.
In start-up companies though, the strategy is often not as clearly defined and communicated. We are often breaking new ground, putting a first price on a first offering. No historic examples to follow. There may be very little guidance on how to set our price. An executive (the founder?) typically creates the pricing strategy. This is where market cap pricing comes into play.
The executive must consciously determine what maximizes the value of the company. In the late 1990’s, investors famously invested based on the number of “eyeballs” at your internet site. In today’s world, investors look more at how many customers you have already served at what price. If you want to maximize the number of customers, keep your prices very low. However, investors also look closely at your profit margin to see how much money you can make when your idea really takes off. The good news is they may look at projected profit margin, using your projected future costs rather than your current costs.
If you have a realistic belief that your costs will decrease significantly and rapidly, you may want to “Forward price” your products by pricing as though you already have those lower costs. In some circumstances you may even set your prices below your current costs. You can justify the losses as part of your product launch expenses. Of course you must have pockets deep enough to cover these losses. This strategy allows you to capture customers more quickly.
Another helpful tactic, especially when creating a software product, is to offer a free version and then upsell a more featured product. It is often much easier to create large demand with free.
Your job, when determining pricing strategy for your start-up company, is to charge a price low enough to capture enough customers that prove to potential investors the idea is a great one, while holding prices high enough that your investors see the idea is profitable.
As an executive at a start-up, you must understand, or at least guess at, what maximizes your market capitalization. This should be part of your strategic planning. Pricing follows strategy.