On the Call with Insignia podcast, Gita Prihanto, COO of Indonesian P2P money transfer fintech Flip, shared that startups need to strike a careful balance while scaling their products and services in today’s challenging economic landscape. As technology companies strive to innovate, here are seven considerations for startups navigating their pricing strategies.
(1) Balancing Product Localization and Pricing
Firstly, startups must realize they can’t please everyone. As they scale, making trade-offs on product localization becomes inevitable. Entrepreneurs need to strike a balance in pricing that caters to local needs while making sense for the business’s overall bottom line. For instance, expanding as a global emerging markets company may require product development trade-offs to address the challenges of product localization and pricing complexity.
(2) The Role of Ideal Customer Profile
Successful scaling also involves identifying the ideal customer profile for each market. It’s not just about finding customers who will love the product but also those who will make the business most viable. This is particularly crucial in nascent industries where enterprise selling becomes a viable choice for monetization.
“I want to make sure when we are pursuing growth when we are developing new products when we are scaling the organization, we should not be forgetting about our customers, the ones who brought us here. And I think we owe it to them to share and develop user satisfaction that is high and continues to improve all the time. So for us, we always put user satisfaction as one of the key OKRs, the company OKRs that we cascade down. And that is something that we are committed to.” – Gita Prihanto, Flip COO on the On Call with Insignia podcast
“Market observations the firm picked up growing PlayingViral also pointed towards the opportunity of addressing commerce and logistics inefficiencies in rural Indonesia. While internet penetration rates were incredibly high throughout both rural and metropolitan Indonesia, most users used this connectivity to simply access social media. Very few, especially those outside of the largest cities, made purchases over the internet. As he studied this seeming paradox, Steven grew to appreciate the highly trust-based nature of the Indonesian economy. Consumers were far more willing to purchase from merchants they knew and trusted rather than from those they met through online storefronts.” – Above passage taken from Lerner, Josh, and Richard Zhu. “Yinglan Tan: Scaling a Venture Capital Firm in Southeast Asia.” Harvard Business School Case 823-025, July 2022, page 7.
(3) Pricing as Part of Experimentation
Nadira Zahiruddin, Head of Innovation Strategy at Super, shares on the podcast the importance of treating pricing as part of experimentation. Test different products on a smaller scale before settling on the ones with the highest potential.
“What we do at Super is we also do a lot of testing or experimentation for different kinds of products. So this is something that we do continuously before we actually decide on which brand we want to focus on or which type of SKUs that we wanna focus on. Because again, since every area has different preferences, what we do is we usually experiment on a smaller scale first with maybe second-tier brands. And then once we do see which are the winning products and really see which products have really big potential, then we focus on those types of products from the experimentation results.”
(4) The Importance of Execution
Execution is vital when it comes to pricing strategies. On-the-ground teams’ ability to negotiate better margins for supply or fixed cost inputs can significantly impact pricing options.
Super’s Nadira shares more on the podcast: “In terms of my role, in the private label, since I have been exposed to the FMCG industry, I help to leverage existing connections and network for suppliers and vendors to negotiate the best margins when we can. I also leverage the knowledge that I have on FMCG on choosing the right types of products and using best practices to build and grow a product for our private label. So meaning setting up OKRs and targets, the right north stars that we need to focus on for each quarter to really achieve our goals for private label and building the number one product in each category.”
“New strategies in rural areas can be quite capital-intensive, especially if you are expanding to new areas. But think about leveraging existing infrastructure and internal data that you have for each market. So, like what Gisella mentioned, the white space analysis is something that we leverage a lot for any kind of new strategy. But other than that, leverage also team members or any other resources to kind of start off new initiatives. So that’s also to become way more efficient in rolling out a new strategy.”
Being data-driven is key here. For example, when data unlocks adjacencies, it’s clear that the adjacencies themselves are increasing the depth and richness of the data pools the company is able to tie into the customer’s experience. In short, what quality of data can expand monetization?
(5) Keeping an Eye on Operating Drivers
The adage that there’s no such thing as a free lunch holds, especially when running multiple P&L accounts that link up in a single customer journey. For example, Carro started primarily as a used car marketplace but quickly evolved into an end-to-end platform covering multiple lines of business (B2B, C2C, B2C), as well as financing and aftersales businesses. Another example is Pinhome which started with a property transaction platform that now includes data analytics-powered discovery, financing and home services. From a monetization perspective, these adjacencies are brought in to not only increase margins and revenues, but also reduce operational costs (e.g. using AI or ML or data analytics to speed up discovery and create greater access to financing that lowers barriers to acquire customers).
Businesses need to have clear oversight on their operating drivers, the costs necessary to run each business unit. This becomes particularly crucial as businesses expand their services, leveraging technology to reduce operational costs and increase margins and revenues.
(6) Burn Multiple and the Cost of Growth
Every entrepreneur needs to answer this: is your growth worth the burn? Is your pricing enough to justify the burn to scale access to the product? The ‘burn multiple’ is a crucial metric, indicating the ratio of the money spent to achieve growth to the revenue being earned.
SaaS investor Shinji Asada shares more on the podcast: “It used to just be growth, right? And in SaaS, if you grew triple, triple double, you would be awarded a term sheet from 10 different SaaS investors, right? But you also have to look at burn multiples, right? Even if you are sacrificing a little bit of growth, I think burn multiple is how you should play the game. And David Sachs, the famous SaaS investor in the US, wrote a famous blog about burn multiples. If you’re at about 1x, you’re a great company. If you’re at 2x, that’s so-so. If you’re at 3x, that’s a bad growth rate…If you are burning money too much and saying that you’re growing your economics doesn’t make sense. That’s not a good business to be in.”
(7) Aligning Costs with the Business Model
Finally, businesses need to ensure that their costs align with their business model. Some businesses might need to spend more on sales, while others might need to invest more in research and development. This depends on the nature of your product and the demographic or segment you are targeting.
Shinji Asada shares on the podcast as well: “So focus on the balance of spending in sales and marketing, R&D, and G&A. And for example, if you are a pure tech company catering towards engineers like Atlassian, of course, spend a lot on R&D, right? I think Atlassian spends over 50% on R&D, whereas Salesforce spends over 50% on sales and marketing because it’s a sales company. So depending on your product, depending on the demographics or segment that you’re targeting, use your sales and marketing, R&D, and G&A wisely.”
In conclusion, entrepreneurs must consider these points when scaling and strategizing pricing. It is a delicate balancing act of meeting market needs, achieving viable growth, managing costs, and delivering a product or service that resonates with the target audience. Each aspect needs to be treated as an integral part of the business plan for a startup to navigate the tricky waters of pricing strategies effectively.
Paulo Joquiño is a writer and content producer for tech companies, and co-author of the book Navigating ASEANnovation. He is currently Editor of Insignia Business Review, the official publication of Insignia Ventures Partners, and senior content strategist for the venture capital firm, where he started right after graduation. As a university student, he took up multiple work opportunities in content and marketing for startups in Asia. These included interning as an associate at G3 Partners, a Seoul-based marketing agency for tech startups, running tech community engagements at coworking space and business community, ASPACE Philippines, and interning at workspace marketplace FlySpaces. He graduated with a BS Management Engineering at Ateneo de Manila University in 2019.