a16z to Entrepreneurs: 6 Key Points on Pricing Strategies for Web3 Product Services

Original: 《6 questions every founder should ask about pricing strategy》

Author: Jason Rosenthal & Maggie Hsu, a16z Crypto

Compiled by: Katie Gu, Odaily

Pricing a new product or service is one of the key challenges founders need to address early in the product development lifecycle. In a relatively new market, such as cryptocurrency, pricing can be difficult to "compare apples to apples."

Pricing strategy depends on the market environment. Fully decentralized projects with their own tokens (like many DeFi and Web3 protocols) often have their own unique logic and design considerations. However, for founders of other crypto-related businesses (such as infrastructure providers, service-based startups, etc.), some basic principles provide a template for product pricing.

The right pricing approach can have a significant impact on the company or attract early customers, market entry strategy, and long-term success. The key is to ensure that the product's features and functionalities align with the pricing philosophy. Conversely, once the product is in the market, early customer expectations have already been set. After that, changing the price can be difficult.

When determining the right pricing for a new product in a new market, every founder should ask themselves the following six questions, which can make the entrepreneurial process easier to manage.

1. What are the different pricing methods? Which method is best for my market?

The first step is to identify all the options for pricing methods. By weighing each option, you can better find the approach that suits you best. This can help identify a mixed pricing method that meets customer needs or market conditions.

Here are some common pricing models, along with a brief description of how they apply, and some traditional and crypto-specific examples for each model. (Note that these pricing frameworks primarily apply to Web3 projects without tokens and not fully decentralized.)

Having understood the most common pricing methods, the next step is how to apply this framework in practice.

In the crypto industry, while not every customer behavior is on-chain, you can use on-chain data to better predict the differences between each pricing method. For insurance products, pricing can be based on the net asset value in the customer's wallet. For crypto security services, pricing can be based on the floor price of an NFT collection multiplied by the number of NFT holders.

Although the above examples fall within the same category, they cover various pricing models, with mixed and matched pricing approaches. For example, Alchemy uses both usage-based and feature-based methods, while The Block employs both usage-based and subscription-based methods. You just need to choose the pricing combination that works best for you.

2. Do I have the opportunity to implement price differentiation in my product line?

Most tech products can attract different categories of customers. The user range spans from beginners with basic needs to professionals seeking more advanced features, to enterprise customers looking for the highest level of service and functionality that the company can offer. This range of needs and desires creates an opportunity to tailor products for different customer segments using the "Good, Better, Best" principle.

Here are some examples of this framework:

A product based on Good: offers a complete set of features at an attractive price point. This is usually the cheapest option and can serve the majority of the customer base. Better builds on Good, typically adding some additional core features to meet the needs of customers who view the product as a critical tool in their daily workflow. Best appeals to those who need a specialized feature set to achieve their goals. Within this framework, founders typically want to experiment and iterate on the product features for each category.

Pro tip: When selling products to enterprises, it is crucial to ensure that the Best standard product includes appropriate levels of support, security, ease of use, and deployment assistance to attract customers.

Identify your target customers. Who is this person? What do they need or want? By putting yourself in their shoes, analyze the various stakeholders of potential customers to understand their value points. For example, a marketing automation tool may directly benefit the marketing team, but it may also involve analytical resources from related teams (such as the data science team) that could be used for other projects. Don't focus solely on the interests of a single stakeholder; also consider the differentiated selling points for all types of stakeholders.

3. Is my pricing appropriate?

While founders often worry that their product pricing is too high, a more common mistake is pricing too low.

For a new tech product to gain market traction, it is essential to envision the market potential of the new product being ten times better. In today's tech market, customers are becoming increasingly "savvy," with too many competing products and services, while traditional vendors enjoy significant "moats" and market share. "Achieving a tenfold improvement in the product" may be the threshold that newcomers need to surpass.

When a new product built by a team can reach this level or even higher standards, the company can gain economic value, leading to increased productivity, accelerated growth, or cost savings, ultimately providing better service to customers. This "value exchange" (economic cycle: improve product --- better serve customers --- generate revenue) is a key factor in successfully pricing a new product.

An effective and simple method is to divide potential customers into two groups (Group A and Group B) and share different price points with them. For Group A, a startup offers "Good" service for X dollars per month, "Better" service for Y dollars per month, and "Best" service for Z dollars per month. Meanwhile, the startup offers the same products to Group B at prices of 5X (Good), 5Y (Better), and 5Z (Best). In this example, the pricing for Group B is actually five times that of Group A.

In this case, what the startup should observe is the change in win rates between the two groups. If four out of five potential customers in Group B still sign up for the service, it indicates that the pricing presented to Group A undervalued the service.

Another consideration is the denomination of pricing. In other words, you need to decide on the combination of fiat currency, stablecoins, and/or tokens you will accept. While accepting multiple payment methods may be more customer-friendly, it can also increase your exposure to market volatility. If your expenses are primarily in fiat currency, it may only make sense to accept fiat and stablecoins.

4. How are other products or services in adjacent markets priced?

When considering how to price a new product or service, one approach is to refer to the methods adopted by peers in similar markets. Investigating similar products can provide useful reference points for your own pricing strategy.

For founders developing in Web3-related fields (such as infrastructure, gaming, developer tools, etc.), look at the pricing of similar Web2 products. For example, many Web3 startups are innovating in the security and anti-fraud space.

By reviewing the pricing pages of many companies providing similar services to Web2 consumers and businesses, such as Aura, Bitwarden, and CrowdStrike, founders can quickly identify some potential pricing models that have already gained traction in the market.

5. Is my economic strategy viable?

Losing money on each customer but making up for it in volume is a strategy that won't last long, especially in an economic environment where startup funding is significantly reduced, as is the case today; this approach will only lead to bankruptcy. Founders should understand the economic viability of their company early on. They should also have a rough forecast of the future state of funding.

In the early days of the internet, founders had many ambitious ideas, such as grocery stores and one-hour delivery of convenience goods. Many such startups went bankrupt, but a few years later, companies like grocery delivery startup Instacart and U.S. food delivery giant DoorDash succeeded with remarkably similar business models. Four factors made these new businesses stand out:

• The number of internet users increased more than tenfold;

• The advent of ubiquitous, always-connected smartphones;

• The development of complex routing and logistics software;

• Suppliers like grocery stores and restaurants were willing to integrate with the software (believing it would drive business growth).

Having the vision, resilience, and capability to change the trajectory of economic returns can provide a long-term sustainable advantage that others find hard to replicate. For example, Apple enjoys high profit margins in its iPhone business due to three factors:

1. Huge sales volumes provide a superior cost structure;

2. The company has built and refined a vast stable supply chain over more than a decade;

3. Positioning as a premium brand. While gross margins do not determine the overall fate of a startup, they can have a long-lasting impact on the company's investment in R&D, marketing, and other key aspects that determine long-term growth rates and success.

6. If my market grows 10x-100x and I capture 100% market share, will I ultimately succeed?

As a founder/CEO, it is normal to spend countless hours and sleepless nights obsessing over the company's strategy and details, striving to find a product-market fit, overcoming numerous obstacles, and achieving long-term success. Deep down in every founder's mind (often in the early stages of entrepreneurship) lies a fear of failure.

However, based on our experience, some outcomes are more painful than failure. For instance, spending years building a product and company, making every decision correctly within your control, only to find that the market opportunity is not large enough to justify the time, talent, and capital invested by the founder and the team.

A simple way to test whether this failure mode might occur is to conduct a straightforward top-down calculation early in the company's history. Assume that the market you are pursuing grows 10x to 100x, and your company captures 100% of that future market share.

Next, assume an average revenue per customer and calculate the future market size * average revenue per customer * market share (in this case, 100%). If the market opportunity does not seem large enough to generate interest, it may be necessary to adjust the market size or average revenue assumptions. As Disney CEO Bob Iger stated in his autobiography, "The best business advice I ever received was to avoid entering industries with 'no market demand.' It's a limited market. While it may be possible to become the largest producer in that business, the global annual consumption might be minuscule."

Please predict, calculate, and objectively assess your situation. Wishing all Web3 founders/developers a smooth journey to success.