(This is number 4 on my list of the top 10 startup mistakes.)
I hate it when it comes up in a business plan: entrepreneurs assuming that it’s important to offer a lower price than their competition. That works for Walmart and Costco. It works for undifferentiated commodities like coal, maybe (at least it does in the examples they teach in microeconomics). But it doesn’t work for startups.
Do you buy the lowest-priced items in the market? Do you have the cheapest Internet provider, the least expensive computer, or the cheapest television? No, probably not. When did you last buy a $0.99 lunch? Where do you prefer to dine, at the cheapest place available?
There’s nothing at all wrong with a startup deciding to start on the higher side of the market, appealing to high-end customers only. A lot of great companies started that way. And even in this worst recession since the Depression, there are still plenty of sales going on at the higher price levels.
Whatever you’re selling, the most visible message you send to your market is your pricing. It normally takes a lot of resources to pull off the low-price, high-volume strategy. Differentiate. And price high enough.