Got a Startup? Put a (Market) Cap on It

Market cap pricing. If you run a start-up this is a great approach to determine how to best price your offerings. 

Let me explain. Before established companies determine their pricing they first determine their corporate strategies. Think Wal-Mart vs. Neiman-Marcus.  These are the strategies the CEO thinks will maximize their market capitalization (i.e. stock price).  

This is especially vital for start-ups looking for investor money. Start-ups, due to their nature, often have "flexible" corporate strategies that can change overnight.  If one doesn't work, try another.  This makes pricing a more difficult task.  Even so, the entrepreneur must put themselves in the shoes of potential investors to figure out what they value.  

During the late 1990's investors famously valued companies based on the number of "eyeballs" a web site attracted. Today, they look more at how many customers are served at what price. Few investors would value your company based solely on Twitter followers. This gives you a great framework to develop pricing strategies. 

If you want to maximize your number of customers, set prices low. Keep in mind, however, that investors always look at profit margin, although they are often willing to accept projected profit margin using your projected future costs. One approach to lower prices (if you have enough funding) is to "forward price" your products - price as though you already have lower costs. This strategy allows you to capture customers more quickly. Of course, only attempt if you firmly believe costs will decrease significantly and rapidly. The Toyota Prius was initially sold below cost using this strategy, and it paid off handsomely.

Another tactic is to offer a free version and then upsell more feature-laden versions. Many cloud-based online companies, such as LinkedIn, do this. Free is a great way to create large demand in a short amount of time.

Whatever your course of action, the goal is to charge a price low enough to capture the most customers possible while keeping prices high enough that your investors see the idea is both great and profitable. 

Action: What pricing strategy will enhance your company's market cap the most?