Pricing for bootstrappers

Pricing is a difficult art to say the least and is dependent on so many factors that this subject itself may be topic of books. We have the benefit of sticking to the small bootstrapping phase of businesses and will apply our learnings of cashflow and paucity of debt, investment in India – few reasons you are bootstrapping in the first place – to discuss some pricing guidelines.

Bootstrappers take pride in running a tight ship, delaying gratification by not paying themselves enough and being creative about doing things no one thought could be done that cheap. Once your costs are so low its very tempting to look at your price as a competitive tool. Its so much easier to go to a prospect and say ‘hey, for what others charge Rs 100, I can offer the same for Rs 60 – sale done. We need to introspect before doing that – what is the reason you are able able to deliver the goods at 60 unlike your competition. If you have created a new business model with a fundamental innovation which reduces price, thats perfect. However, if the only reason you are lower cost is since your costs are low due to small/stingier operations then playing on price might be dangerous.

A friend once gave me a simple formula – find (if you can) how much is the customer willing to pay and calculate how much you can sell for at a profit, then quote higher of the two numbers. The formula is nice and usually works. Just beware that in the low cost Indian economy many people are simply not able to pay much but want your service also. At times what they are asking maybe 25% more than what it costs you. But in small bootstrapped operations percentages have little meaning. Calculate your costs again if you remove all the subsidies like lower salaries, rentals etc and grow your business to 10x. Does it still look 25% profitable? Now projecting costs for 10x your size with zero subsidies is also not the gospel for pricing since otherwise the customer may as well go to the established 10x players. The reality will need to be somewhere in the middle but closer to the later figure. As long as the following works

1. You are profitable on the small base and can scale the operations while maintaining profits, you are pricing it right. If you are ‘subsidising’ the company, thinking that subsidies will scale is going to lead you to a wall.
2. Since you are going to depend on retained profits for growing the company, always try to get a little more profit that you think is enough. It may come from charging higher (by delivering more value) but mostly will come from spending lessor.

Another problem with playing on price is that you get bracketed in that range. A customer which pays you X will refer you to more customer who want to pay X. So if you think it is a temporary affair to play cost, it is not. References are how sales work for bootstrappers and you want the right kind. If you want to play cost to create an initial base be very clear on what you want the projected price to be and then offer a reluctant discount valid for a short period. In fact better than a discount I prefer the try for free option since free is not a price which brackets you. What you really want is the customer to give you a chance even though you have no brand/credibility but buy in to the fact that you are worth the price if your claims are true. What better way to prove the claims than to show/give a free sample. But if the customer can’t even afford the rates you need as a bootstrapper to grow bark up another tree.

You will notice that the above thinking will typically lead to much higher margins than the 15-30% range. More in the 60-80% bracket. Smaller margins workout on high revenues (7.5% EBIDTA works for a Walmart) but to run a small business on a 15% margin is a road to frustration. As you grow the margins will close in to the natural range of your sector or your business. Bootstrapping phase is almost an artificial state which requires a huge stimulus of energy from the founders. With the wrong pricing instead of getting out of bootstrapping you will just end up quitting and going back to a job.

An important question not considered is if people are willing to pay what you want. Once you callibrate what you want with the above, you may want to relook at the business plan’s viability itself.