TITLE

Next-Generation Fellowship
Program

LIFT-OFF – Sprint 3
Week 5- BMC/LC + Pricing

www.wfglobal.org
WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES
 TITLE
By the end of the Sprint, you will be able
to:
Next-Generation 1. Recognize the need to Pivot
Fellowship Program 2. Create a Defendable LC
3. Identify the Top 3 - Risky assumptions and
test your Hypothesis
LIFT-OFF 4. Build you 1-year/3-year projection business
Plan
5. Deploy a Pricing Strategy tested with
SPRINT 3 customers, validated through sales
6. Identify Key metrics are on track

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES

Week 5- BMC/LC + Pricing
The Business Model
Types of Business Models
How do you make money? What is the your path to achieving profitability and
scale? How will sustain the harsh business environment?

The above questions are going to be definitely some of the questions that you
will be frequently asked when you are talking about your business.

What is a Business Model?

A business model describes how an organization creates, delivers, and captures

value, in economic, social, cultural or other contexts. The process of business
model construction and modification is also called business model innovation
and forms a part of business strategy.

Generally speaking, there are a variety of business models that your business
can adopt.

There are the traditional models - Manufacturer, Wholesaler, Distributor,

Retailer that we are all very well conversant with. However, the disruption
caused by technology, automation and the pandemic has given rise to new
offshoots or completely new business models.

Let’s have a look:

Business Model How it works

Franchise model Best for the company’s expansion, franchising allows the
franchisor to license its resources, brand name. Intellectual
property and rights for a franchise to sell its products and
services in exchange for a royalty.
McDonalds’s is the best example, which has 93% of its
franchised restaurants worldwide.

Multi-sided platform Any company that offers services to both sides of business
model carries out a multi-sided business model. The perfect example
is LinkedIn, which provides subscription services to people to find
job opportunities as well as to HR managers to find candidates
for their vacancies.

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES 3

The Business Model
Types of Business Models
Business Model How it works
Freemium business A mix of free and paid services, the freemium model is mostly
model used by tech companies in the Software as a Service (SaaS) or
apps business model. To grow business and acquire customers,
companies offer free (lite) versions to customers but for a limited
time or with limited features. To unlock the upgraded features,
the customer has to opt for paid services.
Examples: Zoom, Dropbox, MailChimp, Evernote etc.
Subscription business This model allows the customer to get services by paying a fixed
model amount every month or year. In this case, the company has to
provide enough value to its customer, so they visit the website
over and over again.
It allows companies to segment the market and offer a specific
number of items in its content under different plans and prices
known as tiered offerings.
Examples: Netflix, LinkedIn, Amazon Prime, Dollar Shave Club,
are few of its examples.
Peer-to-peer business As per this model, a company acts as a middleman between two
model individual parties and create value for both demand and supply
side. It’s different than a typical relationship of a business selling
its services to consumers (B2B or B2C). It makes money through
commissions. Airbnb is the right example that allows
transactions between hosts and hostess.
One-for-one business The one-for-one business model can be referred to as a social
model entrepreneurship business model. It’s a hybrid solution, a
combination of both profit and not-for-profit services. Although
there are some debates about its long-term sustainability, many
companies are pivoting their business models to cater to socially
conscious millennials. The best example is TOMS Shoes that
provides shoes to underprivileged children globally for every pair
of shoes sold.
Examples: TOMS Shoes, Warby Parker (donated eyeglasses)
Hidden revenue This model refers to a revenue generation system in which users
business model don’t have to pay for the services offered, but the company still
earns revenue streams from other sources. Like, Google earns
from advertising money spent by businesses to bid on keywords
while users don’t pay for the search engine.
Examples: Google, Facebook, Instagram, Twitter

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES 4

The Business Model
Types of Business Models
Business Model How it works
Razor and blade n this model, one item (Razor) is sold at a low price while
business model another associated item (blade) is sold at a premium price. It is
also known as a printer and cartridge business model. For
example, the price of inkjet printer itself was just a one-time
expense, however, getting a new ink cartridge replaced is an
ongoing expense for consumers. The model is great if you have
a loyal customer base and if you can create some sort of lock-in
situation with customers.

Example: Xbox or PlayStation Video Games, HP Printers,

Reverse Razor and
Blade business model
Affiliate marketing
business model
The business model is contrary to the razor blade model. It
implies offering low priced products to encourage customers to
buy high priced items as well.
This business model uses the strategy with a one-time offer for
the premium product and acquires more revenue from
secondary items in the long term.
Example: Apple employs this business model perfectly. Apple’s
App Store and iTunes sell apps, movies, songs, etc. at
reasonable rates but charges premium prices on its devices like
iPhone, iPad, and Mac.
In this model, companies make money by featuring, reviewing,
and recommending other company’s products or services. Think
about product review websites. These websites are paid based
on sales opportunities that they bring to their vendor companies.

Examples: NerdWallet, Capterra, MoneySavingExpert.com, and

thewirecutter.
Consulting business Companies that provide consulting services by hiring
model experienced and qualified people and having them assigned on
client’s projects follow the consulting business model. These
companies tend to charge on the hourly basis and/or they take a
percentage share based on the successful completion of the
project (cost reduction project). Mckinsey and Boston Consulting
Group are multi-billion-dollar businesses that are based on this
model.

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES 5

The Business Model
Types of Business Models
Business Model
User-generated content
business model
Online educational
business model
Instant news business
model
WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES
How it works
Allowing users to generate quality content on websites for free to
answer other users’ questions and provide reviews, this business
model is new yet fast-growing.
This model is driven by a wide range of digital commodities, from
videos to reviews, pictures, blog posts, testimonials, and any
other type of content created by users of a brand. And made
accessible via social media.
User-generated content is compiled and sold to companies
seeking to exploit consumers’ ideas and content to promote their
brands.
Examples: The top examples are YouTube, Quora, Yelp, Yahoo
Answers, Reddit.
Targeting the educational industry, including students and
teachers, this business model allows them to get access to
educational resources via flat course fees or subscription. It can
be said as a combination of freemium, course fees, and a
subscription-based model.
Examples: Khan Academy, LinkedIn learning, Coursera, Udemy,
edX, etc.
This model focuses on sharing and updating news instantly
without any intermediary.
Companies that use this model provide open and reliable
channels allowing trusted primary or secondary sources to
communicate breaking news or urgent announcements directly
to their audience.
In the past few years, some social media platforms have
emerged as the go-to option for instant news from primary
sources like presidents, CEOs of companies, and so on.
Example: Twitter is the best example. Users can access the
news in real-time by checking the trending hashtags.
6
The Business Model
Types of Business Models
Business Model How it works

E-Commerce business A simple yet most promising business model, e-commerce

model allows buyers and sellers to connect and transact using an
online platform (online shop).

There are several types of e-commerce business models,

including Business to Business (B2B), Business to
Customer(B2C), Customer to Customer (C2C), and Customer to
Business (C2B).
Example: Amazon, Alibaba, eBay, OLX, Walmart, etc.
Drop-shipping business A cost-effective as well as an exciting business model. In drop-
model shipping, a business owner contacts many different suppliers/
wholesalers to sell their product on the website. Once an order is
placed on a business owner’s website, wholesaler drop-ships the
products directly from the manufacturer to the customer. In this
case, the business owner does not have to hold any an inventory
and uses the third party to manage all the shipping and logistics
needs.
Examples: Doba, Oberlo, Dropship Direct, and Wholesale
2B
Blockchain-based The most advanced, futuristic, and modern technology of
business models Blockchain has changed the entire landscape of transactions,
involving decentralized network system on a global scale.

Using a decentralized network enhances trust and allows

consumers to transact peer-to-peer. Blockchain-based
businesses make a profit using tokens and offer Blockchain as a
service.

Many crypto-currencies like Bitcoin, Ethereum, and

Litecoin use Blockchain technology-based business
model.

50 Types of Business Models (2022) – The Best Examples of Companies Using It

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES 7

Lean Canvas –
Introduction
What is a Lean Canvas?
Lean Canvas is a 1-page business plan template created by Ash Maurya that
helps you deconstruct your idea into its key assumptions. It is adapted from
Alex Osterwalder's Business Model Canvas and optimized for Lean Startups.

Fast: Compared to writing a business plan which can take several weeks or
months, you can outline multiple possible business models on a canvas in one
afternoon.

Portable: A single page business model is much easier to share with others
which means it will be read by more people and also more frequently updated.

Concise: Lean Canvas forces you to distill the essence of your product. You
have 30 seconds to grab the attention of an investor over a metaphorical
elevator ride, and 8 seconds to grab the attention of a customer on your
landing page.
Effective: Whether you're pitching investors or giving an update to your team
or board, our built-in presenter tools allow you to effectively document and
communicate your progress.
Lean Canvas Template

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES 8

 The 9 blocks of the
Lean Canvas
Problem: What problems are your customers facing?

Customer Segment is a homogenous group of customers who:

• Experience a similar need
• Can be offered a solution at a similar cost
• Can buy a solution at a similar price

Solution: What is the possible solution that your customer is ready to pay for?

Unique Value Proposition: Unique Value Proposition is a compelling message

that states why your solution is different and worth buying.

The Channels section should answer the following questions:

• How does each of your customer segments want to engage?
• What should be their points of interaction?
• How do you get, keep, and grow your customers?

Revenue Streams: Revenue is the amount of money your customers are ready
to pay for your solution and how. Revenue can be:
• Fixed revenue
• Recurring revenue

The Cost Structure section of the Lean Canvas should answer these questions:
• What is the resulting cost structure?
• What are the key elements that drive your costs?

The Key Metrics section needs to include:

• Key activities that you need to measure
• Actionable, auditable, and accessible metrics

Unfair Advantage: Unfair Advantage is when a solution cannot be easily copied

or bought.

Capture Your Business Model in 20 Minutes - Lean Canvas

Ash Maurya

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES 9

 The 9 blocks of the
Lean Canvas
Lean Canvas Samples Air BnB

Lean Canvas Samples Starbucks

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES 10

Riskiest Assumptions
Building a startup is all about being fearless and the ability to take risks. What
sets apart the intelligent entrepreneur is the ability to know the risks that are
worth taking and how to continuously work on mitigating them. As a startup
founder and the biggest investor` in your business, you need to articulate the
assumptions you are making and the risks you are taking, prioritize, test, and
identify measures to mitigate them.

What are Risky Assumptions?

Some assumptions are considered risky mainly because they can result in a
product's failure to perform in the marketplace. Businesses have failed because
their assumptions were wrong, and they didn't take the necessary precautions to
address those false assumptions.

What are Risky Assumptions?

Wadhwani Perspective

There are three buckets that your main assumptions are going to fall under:

• Product
• Market
• Business & Execution Capability

Questions to introspect are available in the handout

After having identified the main assumptions the next step is to prioritize the
riskiest assumptions. Prioritizing helps to identify the riskiest assumptions
that can hit the business hard. This also helps understand assumptions that
you should not be worrying about at this point. This helps understand the
right amount of resources and effort to be allocated to different assumptions.

Learnings from start-ups – Risky Assumptions

Ranjeet Pratap Singh; CEO Pratilipi

Learnings from start-ups – Risky Assumptions

Venkatesh Sundar, CMO & Co-founder; Indusface

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES 11

Turning Risky Assumptions
into a Hypothesis
A hypothesis is a statement you believe to be true about your riskiest
assumption. This toolkit guide will assist you in converting the risky assumptions
into hypothesis.

Once we define our assumptions and prioritize them, the next big step is to turn
these into hypotheses. Let us delve further into the video to know more about
the process of turning risky assumptions into hypotheses!

What's a hypothesis?
Simply put, a hypothesis is a statement that can be proven or disproven.

In order to have a good hypothesis, it needs to fulfill 3 things:

1. A good hypothesis must be written in a way that can be proven or

disproven.

2. It must be as specific as possible and clearly defined.

3. It should be quantifiable and measurable. Sometimes you might have a

yes/no hypothesis, but our goal is to be able to quantifiably prove/disprove
our hypotheses.

The entire reason we are doing this is that we are going to have to run
experiments to test out these assumptions, and it's going to be far more helpful
for you to get as much data as possible to justify your experiment's success.

Examples of Good Hypothesis:

Assumption: "People would sign up more if we put pictures of our last climb
online."
Good hypothesis: "At least 50 mountaineers will sign up to hike Mount
Everest with us if we put pictures of our last climb on our website homepage.“
Assumption: "Our teachers will engage more with the app if we gave them
points.“
Good hypothesis: "Our engagement index will improve by 50% if we gave
teachers points for grading assignments."

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES 12

Refining the Business
model / Pivoting
It is widely agreed upon that startups should pivot only when it is absolutely
necessary. While pivoting in the startup ecosystem means shifting to a new
strategy, it is often believed to entail drastically changing the whole company.
But this is not always the case. Oftentimes, a startup only has one important
problem that needs to be addressed and only requires one aspect of the
company to change.

Startups pivot every day in small ways, but some challenging events may force
them to do so far more dramatically. Pivoting changes the direction of a venture
when the current products or services are unable to solve customer problems or
are not generating adequate revenue for the business. The idea behind pivoting
is to enable a startup to improve revenues and customer traction. The decision
to pivot should be an informed one, ensuring that the new idea is a sustainable
and scalable one.

Eric Ries Explains Pivot

How Did Freshworks Beat The COVID Crisis? | Startup Central

The Art of Pivoting | DEETOUR

Startups that Pivoted inthe Recent Times

Pivoting is perhaps easier for startups using digital platforms. But how does it
work for more traditional businesses? Restaurants, for example, can offer flat
rates for several fixed-menu meals. Here is how some Indian companies that
pivoted in recent times.

Homescape: Workshaala is a Bengaluru-based co-working space founded by

Manoj Khandelwal in 2013. The onset of the COVID-19 pandemic has brought
with it social-distancing, working remotely, and smaller companies giving up
their office spaces. The future of the co-working space business still seems
uncertain. With working from home considered as the new normal, the venture
came up with a new initiative called Homescape. This initiative provides
furniture – work tables, chairs – that can turn a part of one’s home into a
comfortable work area. The Founder saw a new opportunity when he saw people
struggling with their productivity in the absence of a proper home office.

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES 13

Pivoting
Pivoting with Caution
Pivots may not always result in raising business performance. For a pivoting to
be successful, you need to make sure that the following conditions are fulfilled:
The lateral movement needs to be aligned to one or multiple trends that are
likely to be long-lasting.

The pivot has to be a lateral movement for the ventures, existing strengths, and
capabilities. The pivot needs to strengthen a company’s strategic intent.
Pivoting should help a company become sustainable and eventually profitable.
Furthermore, the pivoting should help the company preserve and build the brand
value in the minds of the customers.

Types of Pivoting Targeted pivoting

Business architecture

Zoom-in pivoting

Value capture pivoting

Zoom-out pivoting

Growth engine pivoting

Customer segment
pivoting

Channel pivoting

Customer needs pivoting

Technology-based pivoting

Platform Pivoting

Partner/merger pivots

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES 14

Types of Pivoting
Here is a list of the types of pivots, some of them inspired by
Eric Ries’s work, The Lean Startup.

Targeted pivoting is when you change

something in your product to achieve product-
market fit. When the pandemic hit the world,
Stay Golden – a US. Based restaurant pivoted
their business to offer lunch and dinner as meal
kits to prepare at home. They also shifted to a
contactless delivery system through pre-paid
online orders.

Zoom-in pivoting is when a feature of a

product – the most valuable one – is made the
whole product. Instagram once started as a
location-based app, with points offered to users
when they shared photographs. They
eventually zoomed in on their photo-sharing
feature and pivoted to a social media platform
where you can share artsy pictures.

Zoom-out pivoting is when a single does not

suffice to gain enough customer traction. In
this pivoting, a product goes on to become a
feature in a larger product. Chartbeat provided
chat functions to website providers. Eventually,
it pivoted to become a web analytics tool.

Customer segment pivoting is when a

product needs to be optimized for a more
targeted and appreciative customer segment.
For example, a RedBus, a bus ticketing service,
was initially conceptualized to selling a bus
ticket booking platform to operators. However,
they soon realized that commuters would be
more interested in the service and focused
more on traction.

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Types of Pivoting
Customer needs pivoting
Platform Pivoting
Business architecture
Value capture pivoting
WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES
Customer needs pivoting is when feedback
indicates that a product is not solving a significant
pain point. This is an early kind of pivoting, which
means that a startup needs to find a new customer
problem worth solving.
Platform pivoting is when a platform is changed
to an application or vice versa. Sometimes startups
develop a platform but then realize that they do not
have an excellent application for it. Or sometimes,
they build an application and learn that they would
rather be a platform on which others build their
products. Knewton started as an ed-tech company,
offering customized test preparation programs for
students. Later, Knewton pivoted to provide a
customization platform to schools that are building
their online content.
Business architecture pivoting is when companies
switch between two types of businesses – low
volume but high margin or high volume but low
margin. Back in 1970, IBM was leading the
manufacturing of mainframe computers. However,
when the personal computers started disrupting the
market, IBM pivoted to software and IT consulting
services.
Value capture pivoting is when a startup changes
its revenue model. Usually, the reason behind this
kind of Pivoting is that the existing “freemium” or
completely “free” model is not capturing fair value
for the business. Duolingo is a mobile app that
helps users learn new languages. The company
started by offering free services to customers at
large and generated revenue by crowdsourcing
translation services. The revenue model did not
generate value for the company, so they pivoted to
a subscription-based service that allows users to
learn languages offline and without ads.
16
Types of Pivoting
Growth engine pivoting
Channel pivoting
Technology-based pivoting
Partner/merger pivots
WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES
Growth engine pivoting includes three models –
sticky, growth, and viral. Selecting the right model
can make a huge difference in customer traction and
revenue. For example, Dropbox used the sticky
growth engine model and grew from a 10,000 to 4
million user base. They extended the free storage
space for users who brought in other referrals.
Channel pivoting is when businesses select a new
distribution or sales channel to reach larger
customers. Take the example of some television
shows hosted on online streaming channels such as
Disney Hotstar, Netflix, Amazon Primer, and likewise.
Technology-based pivoting is when startups
switch to a new technology even when solving the
same customer problem or need. Usually, companies
make this pivot for better reach, pricing, and
performance. Netflix, for example, pivoted from a
DVD renting business to an online streaming service.
Partner/merger pivots – This kind of pivot
happens to bring together complementary service
offerings that were perhaps two separate companies,
to come together and produce a powerful
combination. Consider the example of MyGlamm and
POPxo. The former is an online beauty products
seller, and the latter is a content, community, and
commerce company based in South Asia. Together,
they offer products along with meaningful content
and community that can engage deeply with the
customers.
17
Executing a Pivot
Executing a pivot requires startups to re-strategize afresh. Pivots are painful and
difficult but sometimes are necessary for the venture. It may necessitate a
change of mission, strategy, skill sets, and even your mindset. A pivot requires a
company to change focus and try new avenues. Sometimes the shift can be
draining for the company and the employees.

1. Talk to your mentor - Pivoting makes a huge demand on a startup’s time,

efforts, and resources. Talk to your mentor before you embark on this new
journey. Share the filled up Pivoting Framework document with your mentor and
have a detailed discussion on the pros and cons of pivoting.

2. Focus on embracing the new - Pivoting is never easy and requires a

massive shift in the mind space of the startup team. It’s like suddenly realizing
that you have been climbing the wrong hill. The best way forward is to have
frequent discussions, infusing the new vision and strategy in every employee of
the startup team. Remember that it is important to take your team along – in
every step – if you decide to pivot.

Set up regular discussions with all your team members, explain to them why you
are pivoting and what are your new goals. Find time to address their concerns
and questions on a one to one basis.

3. Pivoting Requires New Skills - Moving away from what has been the value
proposition of the company requires new skills. This may imply upskilling
existing team members or even getting a few new people. Pivoting sometimes
triggers a churn – of existing team members who cannot make the transition
and even customers. However, the important things weren’t working in the old
way. Hence it is imperative to turn over a new leaf. A mentor or a business
coach is highly recommended at this time. Finally, If you decide to pivot, make
sure you discuss your plans with your mentor in detail.

4. Sketch a new business model - If you decide to pivot – you need to

envisage your problem, solution, value proposition, channels, afresh. You may
retain some of the elements from your previous business model, but you need to
relook at all the nine blocks through a new perspective.

5. Create New Plans - Whether you are making a partial pivot or a hard pivot,
your existing plans will not work. You will need new Financial, Sales, and
Marketing Plans. Discuss the challenges and resource allocations, create a
Roadmap with dependencies and milestones. Have frequent (weekly) reviews
with your teams, make sure they follow and refine the plans.

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES 18

 Pricing Strategies
A pricing strategy is a method that a business can use to determine the best
price for its product/service. Pricing strategies consider factors such as target
audience, revenue goals, brand positioning, consumer demand, economic trends,
competitor pricing, etc.

It is not wrong to say pricing is the most important aspect of a business, but it
can be one of the most complex tasks. If you price your product/service
intelligently, you can generate high sales and profits. However, if you mess up
your pricing, you can risk losing your customers as well as revenues.

How Products Are Priced - The Psychology Of Pricing

Pricing Strategies - How to Price Your Product or Services For Maximum Profit

You Are Pricing Your Product WRONG! How to Determine Optimal Price for Profit

Pricing Right!
Step 1: Quantify Your Buyer Personas

You need a rough outline of who your customers are and what they care about in
your product/service. Go back to your Customer Persona

Ask the following questions in your customer conversations:

• How much are they willing to pay for your product/service to solve their
problem?
• What are the features of your product/service that different users in your
target market segments really value?
• What do they care least about?
• What value messaging drives them through the sales and marketing
funnel?

Quantifying your Buyers Template_Solution Kit

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES 19

Pricing Right!
This template will help you determine who your customers are and what they
value in your product/service. This data is essential to quantifying your
customer personas.

CAC and Pricing:

You should also calculate the Customer Acquisition Cost (CAC) for each
persona. For a startup or a new product, CAC and LTV metrics are vague at
best. You will probably get a decent picture of your CAC before LTV. But to
the extent possible, pull together the information to have better guesses.

CAC focuses on the sales and marketing costs in acquiring a customer. This
includes everything from payments to strategic alliance partnerships, sales,
service support, SEO, etc. What this typically doesn't include are the product
development costs, office space, admin, and the umpteen other costs of
running a business.

Target High-value Customers

Once you have done your calculations properly, particularly the willingness to
pay/price sensitivity and CAC, you will end up with a healthy data-driven
dialogue around who you are best set up to target for your product/service.

Through this activity, you may discover that a persona you thought was less
than ideal is actually an ideal customer. In contrast, you may find a persona
you thought was your key customer is way too expensive to acquire (has a
high CAC).

Your marketing copy can accentuate the value proposition that speaks to each
of these users/target market segments. Not knowing your customer can break
your business.

Step 2: Create your Pricing Strategy:

Pricing strategies are strategic tools that companies use to differentiate their
products/services and gain a competitive advantage over their competitors.
Once you know your high-value customers, you can choose your pricing
strategy that suits most, if not all your high-value customers.

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Pricing Right!

Competition-based Pricing
Competition-based pricing uses the competitors’ prices as a
benchmark. You can price your products slightly below, the same as, or
slightly above your competition or the average of the competition. This
strategy is ideal for digital products and events.

Your competitors have already gone a long way and probably tested
lots of different concepts and pricing strategies, and you can repeat
what your competitors are doing and succeed as well. Also, pay attention to
how long your competitors have been in business and if their pricing
strategy has changed over time.

Another factor you should pay particular attention to is the

competitor’s size and funding. If you are a bootstrapped startup, you should
estimate your chances and think twice before choosing your VC-funded
competitor’s pricing strategy.

Cost-Plus Pricing
Cost-Plus pricing focuses solely on the cost of producing the product/service.
It is also known as markup pricing. To apply the cost-plus pricing strategy,
add a fixed amount or percentage to your product production cost. This
strategy is ideal for retailers.

Freemium Pricing
The term freemium is a combination of “free” and “premium.”
Freemium pricing is when a business owner offers a basic version of the
product free, hoping customers would pay and upgrade to access more
features. This pricing strategy is usually adopted by SaaS and other software
product companies.

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES 21

Pricing Right!
The law of equivalent exchange states that when you give
away something, you have to receive something back. If you adopt
freemium pricing and give away your product for free, there should be some
kind of return — a word-of-mouth recommendation, valuable feedback,
email address, or possibility to convert into a paying customer in the future. If
non-paying customers don’t bring you any value, you shouldn’t consider
freemium pricing as an option.

If you are a bootstrapped startup, you cannot afford a

freemium pricing strategy. But if you are a VC funded company and if you
have done the math and it seems like your funding is large enough to support
all the freemiums, then go for it.

Skimming Pricing
When companies charge the highest possible price for a new
product/service and then lower it over time as the product/service becomes
less popular, it is termed skimming pricing.
This pricing strategy is ideal for tech products and new products/services
but can also annoy consumers who bought at the full price. Example: Sony
used this strategy when it introduced HDTVs in the 1990s. Since then, the
price of the HDTV has come down from $43,000 to approximately $2,000.

Penetration Pricing
This pricing strategy is the complete opposite of skimming pricing.
This pricing strategy works for companies looking to break into
existing competitive markets. By entering the market at a very low price, they
tend to draw attention and revenue away from their competitors. However,
this strategy is not sustainable in the long run and can be applied for a
short duration only as prices go up eventually. Examples: Netflix

Premium Pricing
Premium or prestige or luxury pricing is when a product/service is priced
high to present an image that the product/service is premium or luxury.
This pricing strategy focuses on the perceived value of the product/service
rather than its actual cost of production.

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Pricing Right!
Project-based Pricing
Project-based pricing is the opposite of hourly pricing. In this approach, a flat
fee per project is charged instead of a direct exchange of money for time. It is
also used by freelancers, consultants, contractors, and other service
providers. Project-based pricing may be estimated based on the value of the
project deliverables.

Value-based Pricing
Value-based pricing is when companies price their products/services based
on what the customers are willing to pay. If used accurately, a value-
based pricing strategy can augment your customer loyalty. It can also help
you prioritize your customers in other areas of your business, like service
and marketing. However, this pricing strategy requires you to constantly be
in tune with your various customer profiles and buyer personas and vary
your prices accordingly.

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Pitfalls to avoid while pricing
Conjuring up prices without talking to customers: Many startups’
decisions around pricing are taken sitting in front of a computer and not by
talking to customers. Meet your customers, talk to them, and engage with
them before arriving at your product/service prices. Having 3-5 customer
meetings daily is a good practice before taking your pricing decision.

Undercutting all the time: If undercutting is your entire pricing strategy,

then it is not a good strategy.

Undervaluing your product/service: Don’t undervalue your

product/service by charging less or not charging at all. Your customers should
not reject your product/service as being too cheap and hence of inferior
quality.

Focusing on a specific margin: Profit margins are important, but once you
have covered your costs, everything above is a play of marketing. If you can’t
cover your costs with what the market is willing to pay and you cannot
position your product/service for it to pay more, then you don’t have
a commercial product-market fit.

Copying another company’s pricing: You should know how your

competitors are pricing their products/services, but only so you know how you
and your product/service is different. Conduct research to get a deep
understanding of your market and how to position your product/service
competitively with your pricing. Your pricing strategy should be part of your
overall marketing strategy.

Experiment and Learn

It is not your customer’s job to set pricing. An optimal price is one that is
accepted but not without some initial resistance – Ash Maurya
You already have a fair idea of your most valuable buyer personas, got an
estimate of the CAC, and chosen a specific model for your pricing. Now it is
time to test those details in the market. Try the following approaches to
experiment with your pricing.

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Pitfalls to avoid while pricing
Implement A/B testing: A/B price testing is definitely one of the most
difficult tasks you can undertake. While doing A/B testing, do not offer two
products at exactly the same price point. Instead of showing different price
points for the same product, show different price points for slightly different
product offerings. Vary your product offerings by adding or removing some
trivial features. This kind of testing is ideal for products that have no
competitors in the market.

Offer standard and premium prices: By offering a standard and premium

version at various price points, buyers are more likely to perceive the
standard price as reasonable, as the premium is far higher.

Measure the revenue rather than the conversion rate: Startups often
misconstrue a high conversion rate as a hallmark of a good pricing strategy.
Measure your revenue rather than your conversion rate — if your products
have a low price, you have to sell a considerably high number of products to
make a profit.

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Call to Action!
Step 1: Create your Lean Canvas

Step 2: Identify your Riskiest Assumptions

Step 3: Test your Hypothesis

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 Call to Action!
Step 3: Risky Assumptions Experiment Canvas

Step 4: Identifying the need to Pivot

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 Call to Action!
Step 5:Price it Right!

1. Quantify your Buyer Persona

2. Build your pricing model

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FINAL COVER

nextgen.global@wfglobal.org

WADHWANI FOUNDATION | CREATING JOBS CHANGING LIVES