Startup Pricing: How to Price Your Product

London, July 1877. John Ruskin, the most powerful art critic of the day, is irritated by a painting he sees at the Grosvenor Gallery. It is a dark night scene by James McNeill Whistler depicting fireworks over Cremorne Gardens: Nocturne in Black and Gold, The Falling Rocket. On 2 July, in his publication Fors Clavigera, Ruskin writes that he never expected to hear a coxcomb ask 200 guineas for flinging a pot of paint in the public's face.

Whistler sues for libel and claims £1,000 in damages. The case is heard on 25 and 26 November 1878. Ruskin's counsel, the Attorney General Sir John Holker, asks Whistler how long it took him to "knock off" the painting. One day, says Whistler, and perhaps a few touches the following day; call it two days.

According to the trial transcript Whistler published in 1890 in his book The Gentle Art of Making Enemies, the exchange continued like this:

"So you ask 200 guineas for two days' labour!"
"No. I ask it for the knowledge of a lifetime."

The courtroom breaks into applause. Ruskin's witness, the painter Edward Burne-Jones, thinks the price too high; he says one should consider how much serious work is done for less money. The jury finds for Whistler but awards him just one farthing in damages, the smallest coin there was. Costs are split, and in May 1879 Whistler goes bankrupt.

What really faced off in that courtroom were two ways of setting a price. One counted the labour; the other counted the value.

What Is Your Product's Price Based On?

When putting a price on a product, most founders ask themselves Holker's question: how much work did I put into this, and what does it cost me? They add a bit of profit on top and stick on the label. This is called cost-plus pricing. It's easy, but it says nothing from the customer's point of view.

Kevin Hale, a Y Combinator partner, suggests thinking of price as a thermometer in his "Startup pricing 101" talk from YC's Startup School curriculum. Cost sits at the bottom, price in the middle, and the value in the customer's eyes at the top. The gap between price and cost is your incentive to sell; the gap between price and value is the customer's incentive to buy. For Hale, the goal is value-based pricing: set your price downwards from value, not upwards from cost.

Where Do Startups Go Wrong with Pricing?

Staying Too Cheap

According to Hale, the pricing advice YC gives startups most often is always the same: you're charging too little. Founders underestimate their costs, don't know what value the customer places on the product, or can't communicate that value. The result is a margin that doesn't even cover the cost of winning a new customer.

Looking at the Wrong Customer

The idea that "if I sell a better product than my competitor at half the price, I'll win" almost never works. A startup opening up a new market finds its first customers, according to Hale, among early adopters, who make up 2 to 5 per cent of the market. These people don't look at price; they look at the benefit that will put them ahead of their rivals. A very good product at a very low price makes them think "there must be a catch". If you're talking to someone whose decisions take months and who asks what everyone else is using, you're probably not talking to an early adopter.

Forgetting That Price Shapes Your Sales Model

In this talk, which has sat in YC's library since 2019, Hale suggests a simple calculation: to become a billion-dollar company you need roughly $100 million in annual revenue; at your price, how many customers does that take? He then shows how price constrains the way you sell. A product under $2,000 a year has to sell itself; there's no budget for a sales team or expensive advertising. Between $2,000 and $10,000, a sales rep and product demos become possible, and the sales process shouldn't take more than one to three months. Above $25,000, a sales team, dedicated account managers and six-to-twelve-month sales cycles come into play.

The real danger lies in between. If convincing a customer takes months but the money you make doesn't justify the effort, Hale calls it the dead zone. The way out is either to raise your price or to radically cut the cost of acquiring customers.

The 10/5/20 Rule for Pricing Your Product

The rule Hale suggests as a starting point is made up of three numbers:

10: The value the customer places on your product should be ten times the price, and that gap should be obvious at a glance.
5: As soon as you have a price, especially if you sell to businesses, make a habit of raising it by 5 per cent.
20: When you start losing around 20 per cent of your deals on price, you're getting close to the right level.

Don't overcomplicate your testing either. Open a spreadsheet: the prices you've tried, the conversion rate for each, units sold and total revenue. The winning price usually makes itself obvious straight away.

Price, Praise and Prize: The Same Root

The English word "price" comes from the Latin "pretium", meaning reward, value, worth. According to Etymonline, the Old French "pris" meant both price and honour, renown and praise. "Price", "praise" and "prize" are three forms of the same word that drifted apart over time. Ruskin's article sat right on this knot: when the critic withdrew his praise, the price was called into question too.

"Value" comes from the Latin "valere", the verb meaning to be strong and to be worth something. Etymonline also notes that in painting the word describes the relationship between light and dark tones. Whistler's almost entirely dark painting was built precisely on these values.

The Turkish word for price, "fiyat", is even more surprising. According to the Nişanyan Sözlük (an etymological dictionary of Turkish), the word derives from the Arabic preposition "fī", meaning "in"; its plural form and its meaning of "price" are unique to Turkish. In his 1900 dictionary Kâmus-ı Türkî, Şemseddin Sami also wrote that using "fī" to mean price was a galat, an established error. Like a word born from a preposition, a price says nothing on its own; you have to look at what it sits within.

Final Word

In the third act of Oscar Wilde's play Lady Windermere's Fan, first staged on 20 February 1892, Cecil Graham asks what a cynic is. Lord Darlington answers, and Graham adds:

"A man who knows the price of everything and the value of nothing."
"And a sentimentalist sees an absurd value in everything, and doesn't know the market price of any single thing."

A good price sits somewhere between these two men. So when you set your product's price, which one did you behave like? Are you selling your customer two days' labour, or the knowledge of a lifetime?

If you want to work out how your price affects your cash and your runway, take a look at Before the Cash Runs Out: How to Manage Runway and Burn Rate.