How to Not Screw Up Pricing For Your Startup

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• Change Only Comes After Disproportionate Pain

Why This Episode Exists + Nerdy Stuff Not In The Pod 💡

This week, we talk about pricing.

There isn’t a tougher or more emotional part of the startup process for entrepreneurs, and nearly everyone screws it up.

We talk through Taco Bell Pricing and The Four Drivers of Margin through the lens of a few businesses, including AI assistants, honey, and basketball lessons.

One of my favorite ideas from this podcast is very visual, which obviously can’t go in the pod so I’ll put it here.

The idea is around how people don’t change until AFTER they feel pain. And once there’s pain and a reason to change, they’ll pay 5-10x more than they would’ve paid before the pain. It looks like this:

Without this inciting incident, the customer looks like this:

Nearly every customer you bump into will be on that second graph and will not be worth your time. The ability to price high and get a solid margin comes from picking customers on that first graph.

We dive into that, and a bunch more, on the pod.

Enjoy!

Pod References

• Tacklebox

• Idea to Startup Newsletter

• The Bear Scene

• Tonies

• Idea to Startup Bot

Pod Timestamps:

00:34 Intro
02:00 Taco Bell Pricing
03:16 Forks and The Freakin’ Super Bowl
05:02 Stubbing Your Toe on Reality
09:00 Smooth Jazz
09:34 Four Places to Find Margin
11:19 Margin Comes After Pain
13:09 Margin Comes From Removing the Worst Part of a Painful Process
14:11 Margin Comes From a Status Level Jump
14:50 Margin from Specificity and Problem Language
16:35 Basketball Lesson Pricing
19:08 Pay Yourself First
22:56 The End - My Son Loves to Dance

Transcript - Feel Free to Read it Like a Long-form Article:

Today, we’re going to help you slap a price tag on your first product, whether it's already on the market, in development, or just a twinkle in your eye.

Pricing is usually the last thing entrepreneurs think about, and they nearly always get it wrong.

We’re also going to talk about my son dancing, and, believe it or not, it’s probably the most important part about pricing. But we’ll do that last. We’ll get there.

The sequence for entrepreneurs I’ve met is nearly always idea, customer, product, then, when every last excuse is gone, finally, grudgingly, price. And that reluctant price comes from looking at competitive products and then charging a bit, or a lot, less. Or, just giving it away for free. You’re new. You don’t have as many features. That’s fair, right?

We’re 215 episodes in so you probably sense my sarcasm by this point. Nearly every founder I’ve met screws up pricing because it’s foreign and emotionally charged because money’s a made up thing and we’ve all got a different relationship to it and we’re all irrational about it. But if you screw up pricing, you probably irreparably screw up your chance at a successful business. A bad price cascades down into bad customers which lead to bad products which lead to bad marketing which lead to you showing up on Deloittes doorstep with an 13 month gap in your resume. And we don’t want that. We want you to never build a resume again. So, let’s figure pricing out.

By the end of today, I’ll convince you that your first product needs to have, what I call, a Taco Bell price. Not because of how much Taco Bell charges, but because your first price should make you feel like you just ate that new taco bell concoction that’s got a cheesy tortilla and beans and hot sauce and the meat that comes from a hose in the ceiling and for some reason there’s a massive cheese-it in the middle. Quoting your price should make you feel sick to your stomach, doubling over in pain, queasy, possibly regretting every life decision you’ve ever made. Like I’d imagine that Taco Bell thing does. That’s when you know you’ve priced your product right.

The right price on your initial product will have 95% of potential customers dismiss it as impossibly high and 5% of customers yelp because it’s impossibly low. That’s where you need to start.

We’ll talk about how to do that, practically, today. About how it won’t ruin your business like you think it will.

We’ve got a bunch of examples because you’ve probably never priced anything brand new before so the strategies will all be foreign and you need context and a framework.

But first, we’ve got to talk about the best episode of the best show of the past decade - the episode is called Forks, and the show is called The Bear.

The arc of Richie, a character in the Bear, is almost frustratingly good. I won’t give spoilers, but his evolution lands him late in season two staging at a 3 michelin star restaurant for a week - basically, helping out with whatever jobs no one else wants to do. His task for the first couple of days is shining forks. Bins and bins of forks, one at a time. I’ll put the link to the clip in the show notes.

He’s upset about this and is doing a half assed job when his supervisor comes by and tells him a fork he just finished with isn’t clean. Richie rolls his eyes and says “yoooo - they’re goddam forks,” to which the supervisor brings him outside to talk.

He tells him that there’s a waitlist 5,000 people long trying to eat at the restaurant. That people wait their lives to eat there. He tells him about the faces of the people who get off that list and get to spend their time and their money there, how stoked they are to be picked.

“Every day here,” he says, “is the freaking super bowl.”

Building a startup is all the things you know it will be but can’t really internalize until they actually happen to you. Every startup is equally hard, whether the idea is a big one or a small one, a SaaS tool or a physical product, B2B or B2C, a success or a failure.

We talk a lot about motivation, but the best motivation to do that hard work is to be working on something that really freaking matters to someone. Something people would happily, willingly, unquestionably overpay for because the leap it helps them make is that important. That scarce.

As a founder, you should be continually working to face things how they truly are - in the words of an author I unfortunately can’t remember or find or I’d give them credit - you should be continually stubbing your toe on reality. Pricing is maybe the best tool for that job. It’s an accelerant like those Nos cans in the fast and furious movies to the moment where you know, clearly, your real value to early customers.

If your value is the cost of the inputs of your product plus a 30% margin, or, maybe, just slightly less than whatever competitors charge, you’re sunk. You’re entering yourself in a race to the bottom from day one - a competition with your competitors to lower the cost of your inputs or the labor required to combine them into your product.

Worst of all, your business won’t be able to grow.

Because your early margin will fund the growth and development of your business. It gives you runway - time to figure out economies of scale and features and all the things that allow you to move to the right of the adoption curve, to customers that aren’t quite as excited about your product as your first customers are, and, accordingly, aren’t willing to pay as much.

That first price you charge to your first customers will, counterintuitively, be the highest price you’re ever able to charge, even though your product will seem the least developed. These customers will work with you despite the fact that you’ve got no track record or social proof because you’re solving something that important. Something no one else can solve. And they’ll pay for it.

I’d recommend this approach even if you’re trying to raise venture funding eventually, because, again, it’ll attract the customers that care. It’ll make sure the thing you’re working on every day is the, quote, freaking super bowl, for someone. And, it’ll give you options. If you don’t raise funding, who cares - your business is profitable.

I remember when I was building Find Your Lobster, a mobile dating app back in the Hinge and Tinder days, and things were at their toughest. Our app was free, and people sort of used it but also jumped between us and hinge and tinder and there wasn’t any real differentiation. The goal was always to get a bunch of people and then figure out the monetization thing later. At the time, this was the way.

Because of that, I didn’t really know what I had. All my customers were there for different reasons. I couldn’t get feedback from them because it wasn’t important enough to them to give feedback - like when amazon asks you to leave a review on toothpaste. It wasn’t the super bowl for any of my customers - it was just one more app they checked in on once in a while. If it was gone, they wouldn’t miss it.

I specifically remember a Saturday night at maybe 2am on the 20th or 30th or 50th day in a row that I’d worked, sitting in my parents basement because I’d moved home to save money on rent, and it hit me that I just didn’t care. Because my customers didn’t care. I’d built something they were meh about. Something I couldn’t charge a premium for because they wouldn’t dream of paying it. And I was in purgatory. I was busting my ass for my reputation and for my investors and because I didn’t want to fail. But it wasn’t for my customers, because the product didn’t matter to them.

Forget it being the super bowl for my customers - it wasn’t even a duke basketball game (editors note: pack of cheaters).

If, instead, I’d decided that I’d only build something if I could charge $99 a month for it, because that’s what it cost to build that business, it would’ve forced me to find customers willing, happy, able to pay $99 a month. It would’ve forced me to be different. To stub my toe on reality.

Pricing isn’t something to be avoided - it’s a lever to get you to reality. To make sure you’re moving towards the freakin super bowl. To ensure your ROE - return on effort - will be worth it.

Once you make stubbing your toe on reality a practice, you’ll love it. My old boss always used to say that reality was energizing. When things are tough, in business or in life, getting to the clearest view of reality allows you to make an effective plan. To get momentum. And nothings better than that. The draining thing is living in the unknown.

So, let’s use pricing to get to reality.

After, a little smooooooth jazz.

What Price Is - The Four Places to Find Margin

Let’s start with what the price of your product is.

It is NOT an aggregate of the cost of your inputs. It’s a measure of your differentiation.

Entrepreneurs think about price a lot - how much their product will cost - but what actually matters is margin. And margin, for us, just means differentiation. How much someone will pay above your input costs because of how unique or differentiated or scarce or…whatever… what you’ve built is. Startups are a hunt for that margin.

I think about margin like the grade a teacher gives you at the end of the semester. It shows how well you’ve done on customer development. If you’ve wiggled your way to a customer who’s in a giant hole and no one else has noticed or can throw them a rope, you’ll be able to charge a lot for that rope. There’s huge margin there.

If, instead, you’ve found your way to a customer who needs to walk five blocks to get to dinner and you pull up and offer them a ride, they’ll probably only take it if it’s cheap or free. The alternative - walking a few blocks - just isn’t bad. There’s no margin there.

Unless, of course, you’ve positioned yourself at the end of a marathon, and runners who just finished 26 miles would pay any amount of money to avoid taking another step. And, if you’re the only car there.

The best way to become a good chef is to find a hungry customer.

We’ve always found that margin comes from reliable places. There are four big places we’ll talk through today:

The Four Best Places to Find Margin:

1. Margin comes after PAIN.

I wrote about this in my Sunday member email this past week - email team@gettacklebox dot com with the subject SUNDAY if you’d like to get on that list.

When you’re picking a customer to start with, you need to pick a customer that’s actively trying to solve a painful problem. It’s likely that during your interviews you’ll find lots of customers that you’ll notice are in holes but either don’t recognize they’re in a hole, or, for whatever reason, aren’t trying to get out. Customers can stay irrational longer than you can stay solvent, so never try to convince someone they’re in a hole and that it makes sense to do something about it.

The best customer, and the place where margin lives, exists in a world after pain.

If your product is a pilates program that helps build up a strong core, a great customer is not someone who just wants to get a strong core. It’s someone who’s felt serious, unsolvable pain because they don’t have a strong core, for some reason. Maybe they had crippling back pain and needed to have surgery and the doctor said the way to get back pain free post surgery is a strong core. Maybe they tried physical therapy and strength classes but neither worked. Maybe they heard pilates, specifically pilates for people coming back from back surgery, could help. That’s where the margin lives and the only place change happens. After pain.

Another example is a service to potty train your kid. After you’ve beat your head against the wall for weeks or months and felt the pain of accidents and embarrassment and diaper changes, you’re ready to pay a huge margin for someone to handle it.

If your customer can’t pinpoint the moment in the past where they felt egregious, disproportionate pain because of the problem you’re solving, it’s unlikely they’ll change their behavior to solve the problem and unlikely they’ll pay you a healthy margin to help.

1. Margin Comes from Removing The Worst Part of a Painful Process

Margin comes from taking something people hate doing, but have to do, off their plate.

A business went through Tacklebox a while back that was going to be a directory for people above the age of 60 find new doctors. People generally have the same doctor from the time they’re in their 20s, so usually by the time they’re 50 or 60 that doctor is retiring and they need to find a new one. This is disconcerting and hard.

At first, the product was a directory to help them literally find doctors nearby. But the finding wasn’t the hard part - the evaluating was.

So, they started with a concierge service that began by understanding the needs of the patient, then found a handful of qualified doctors, scheduled Zoom introductory calls, and created takeaways and suggestions. They charged a lot for this and people happily paid, as it removed the most painful part of a daunting process.

I’ll say it again. Margin comes from doing things people hate doing.

1. Margin comes from a Status Level Jump

People make decisions based on envy, not greed.

We judge ourselves based on the people or companies we deem as in our peer group, and the group one deviation away. You don’t compare yourself against Jeff Bezos, you compare yourself against your neighbor.

So, helping your customer jump out of their current status group and move into a new status group generates margin. People will pay irrational amounts for it, especially when it’s blindly obvious that the transformation has happened.

We’ll talk through an example of this in a moment.

1. Margin comes from Specificity and Problem Language

When I used to live in NYC, Ruby and I would go to the farmers market in Union Square every Wednesday. Our first stop was obviously the farm that had the barbecue pig ears for young rubes, but after that we’d walk around and try to figure out why certain stands had lines and others didn’t, because that’s the sort of thing that fascinates me.

The farm stand lines would fluctuate solely based on line size. When one line got a bit long, people would go to the farm stand with the fewest people. Like the lines at the grocery store. Most other stands were similar.

But the honey stands - and there were always three or more - had a pattern, even though they all sold honey from upstate NY or Jersey. One always had a long line, the others did the grocery store thing.

So, what was going on?

The stands with the shorter, fluctuating lines sold honey that was quote organic and ethically sourced, and great in tea or cereal or, quote, wherever you put it.

The stand with the line had a sandwich board out front that said “Our Honey Cures Your Seasonal Allergies.” Then, the honey at the stand was broken into two categories - one said “your eyes and throat itch,” the other said “your nose is running and your head hurts.” Each had a suggested tea you could buy along with the honey.

And, importantly for our conversation today, the honey was twice as expensive as the honey at other stands.

People pay to solve problems, and they pay for someone who understands exactly how they feel. Specificity and problem language create margin.

Now, let’s use an example. One I’ve talked about on the pod but not in this way.

Basketball Lessons.

Right out of college, I taught basketball lessons on weekends to middle school kids on the Upper East side.

There were a ton of people giving basketball lessons on all the empty courts, with most putting fliers around all the schools. I looked at these fliers and decided I’d differentiate on something none of the other coaches mentioned - they all talked about price and the types of drills they ran and individual or small group packages. I said I was there to work with kids who wanted to play college basketball. This idea came to me as that’s what anyone who knew me and had younger kids asked about - how could they prep them to play college hoops.

I inadvertently used problem language - I didn’t know what it was at the time - but my fliers said something like “Unless you played college basketball, you don’t know the drills that’ll help prepare your kid for it. I did, and I can teach them.” The goal, as stated on the flier, was to prep their kids for a college scholarship.

And, I charged double what every other coach charged - often more. My thinking was that if I was waking up at 7 in the morning on weekends, it had to be worth it. Return on effort.

I quickly got a roster of kids, and the parents talked incessantly about colleges. How they could meet coaches, when recruiting started, what AAU teams their kid need to play on.

I realize now, this was the third type of margin I mentioned. A status level jump. All the other kids were playing basketball because they wanted to get better and maybe make a high school team, but their kid had their sights set on college already.

A really interesting thing happens when you build a product that has a big margin. Your customers get involved. They give you tons of feedback and help you make the product fit what they’re looking for.

I remember one day asking a parent if, instead of starting at 8am, we could start at 730 the following weekend. The courts got crowded at 8, as that’s when all the other lessons started. A half hour earlier would give us some more space.

“We can do earlier. Let’s do 630,” the dad exclaimed.

“How great would it be if, when everyone showed up for our lesson, our son was already drenched in sweat and finished. That shows dedication.”

So, we started at 630. And I charged more.

Margin comes from a status level jump - particularly a highly visible one.

Pay yourself first and a $900 dollar assistant

The best personal finance advice is to pay yourself first.

The idea is simple - you take a portion of your paycheck the moment you get it and immediately put it into savings or investments or use it to pay off debts. That all but ensures your finances will be healthy long-term.

I think of pricing the same way. The pay yourself version of this is to lead with price. To make sure there’s enough margin for the thing to make sense to build.

A founder from the pod reached out recently because they’re starting a business that’ll be sort of a personal AI assistant. They thought it’d be right up my alley, and it is, although they hadn’t even considered a pun name, which I felt was lazy. At least give me a token chatjeevespt or something. Although maybe nothing is better than that.

Anyway, the founder excitedly told me the features - “it could summarize your emails and give smart takes on your task list and creates daily logs or journals of who you met with. It can pull together recordings of zooms and schedule follow-up meetings - it’s literally like a full-time assistant.”

Cool, I thought.

How much are you charging?

“Well, I want it to be free for initial users, but eventually I’ll be in the $9 to 30 dollars a month range, depending on which plan you have. So it’s sort of like netflix plus spotify - I want to keep it under that.”

And that’s what founders do with pricing. Pick arbitrary numbers - netflix plus spotify, or numbers that seem sort of low.

My advice, as always, is to do the opposite. At least to start.

To find a customer and create margin with your product in one of the ways we mentioned. To charge a whole lot to solve a real problem. To make sure the customer’s got skin in the game - a reason to give you real feedback.

I gave a pricing prompt that’s always helpful - I asked what they’d do if they needed to charge $300 a month.

“Well, we’d have to think of people that really needed this thing. One customer that’s jumped out from early customer interviews has been people who are running communities. Often, they have between 50 and 200 people in an online community - for a podcast or a youtube show or a course or a cohort or accelerator program - and managing that is way more work than they thought. They’ve often tried to manage it themselves, but it’s exhausting - hours a day. Or, they hired someone, but that’s expensive.

So, I guess they’d happily pay $300 a month if this managed a community for them, with prompts and responses and things.”

And there you go. A few types of margin.

First, the customers felt the pain - they did it themselves.

Second, you took the hard part - interacting with the community in real-time, which would mean they’d have to have alerts on all day and night - off their plate.

Third, the status level jump of a high quality community.

These all equal margin. That’s, maybe, an interesting first customer.

And then, if someone pays you $300 or $500 or $900 a month, they’ll care. They’ll help you iterate through feedback and product suggestions. They’ll get on calls with you to help you better serve them. You’ll learn what it takes to have a customer that pays you a lot.

The product will certainly be more manual and time intensive and not as scalable. But that’s alright - you’ll figure out how to scale a product worth hundreds a month, not, quote, the same as netflix.

What if you charged 10x what you’re planning on charging?

Who would pay?

Why?

Where’s the margin?

The End - My Son Loves to Dance

My son loves to dance.

We’ve got a Tonie box, which, if you don’t have a toddler, is a little box you can put figurines on - like Moana or Simba - and it plays songs from those movies. He loves picking out a figurine and then dancing while the songs play. When the tonie runs out of batteries he gets sad and brings it to me and says “more plss.”

There’s a brewery near us we go to a lot with live music most nights, and when we get into the parking lot he realizes and starts squealing and the second we’re through the gate he sprints to the front of the band and shakes his hips like those old hula girls that used to sit on people’s dashboards in 80s movies. He’d stay there for 10 hours if we let him.

He dances to the construnction sounds from our neighbors house and the the turn signal in my car and the coffee grinder in the morning.

What I’m getting at is that I love watching my son dance more than just about anything in the world.

And that is why pricing is so important.

Because of all the things you can screw up with a startup, pricing is probably the worst one. Because pricing is the top of the waterfall.

If you don’t charge a lot, you’ll get customers that don’t really care. And if they don’t really care, they’ll always want to pay less and get more to see if that makes them care. And they’ll be fickle and they’ll leave for no reason. And they’ll be expensive to find and convert. And you’ll spend your life trying to figure out how to make a business work with tiny margins. And you won’t be able to do it.

And your son will dance in the other room and you won’t see it. Or, whatever your version of that is. Your family, your friends, the piano in the living room, the novel you’d love to write - they won’t be as big a part of your life because you’ll be trying to make someone who doesn’t care care. Or trying to figure out how to make a business work with people paying you a few shiny pennies a month.

Stub your toe on reality. Find real margin - real value. And charge for it.

Then, watch your son dance.

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