- Many startups undercharge for their products, thinking that investors don't want them to charge or that cheaper prices will attract customers.
- However, charging too little can lead to inaccurate data about the demand for the product and attract customers who only want the cheapest option.
- Successful products usually charge a premium because they solve a significant problem for customers.
- Examples of successful companies like Instacart, DoorDash, Airbnb, and Dropbox show that they charged higher prices rather than being significantly cheaper than competitors.
- Zapier charged money while IFTTT did not, indicating that customers were willing to pay for a more expensive but better substitute.

Dalton Caldwell, Y Combinator partner and founder of imeem and Mixed Media Labs, on pricing and how most startups undercharge.

https://twitter.com/daltonc

Y Combinator invests a small amount of money ($150k) in a large number of startups (recently 200), twice a year. 

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Most of the time, people are way undercharging for their product.

For some reason, the idea is out there that you should either not charge for your product or you charge such a tiny fraction of what you could be charging that you're not set up for success.

So to give you an example, I've seen startups charge 1 10th or 1 100th of what they should actually be charging for whatever reason.

I think there's ideas out there that investors want you to never charge or they, I don't know where these ideas come from, but a lot of the time, the first advice we give to people is to dramatically increase their prices as fast as possible.

A lot of the times, Startups apply to YC saying that they are competing on price and that the way that they're winning versus competitors is that their product is cheaper.

The reason that is so dangerous is you don't actually know if your product is good or it's solving a real problem for people and you could just be getting, trying to get people that want the cheapest possible product.

And so if you are charging a fraction of other options for your thing, it could be that you're actually getting bad data about whether or not anyone wants your thing, right?

And so that's 1 way that you know that you're in trouble is that your entire customer acquisition strategy is like your product is way cheaper than everyone else's.

Usually a good product that we see become successful does not charge less than competitors.

It's because it solves such a huge problem for their customers that they will happily pay a premium versus other options on the market because it's such a great product, right?

That's a sign that you've made something that people want is that the market pays a premium, not a massive discount to what other options are.

It wasn't like DoorDash was, hey, we're like other things and we're like a tenth of the cost.

So I'm sure there are examples of those, but generally speaking of our hugely successful companies, they are either serving a market that has never been served before, and so it's expensive, or it's actually more expensive than direct competitors.

I mean, Zapier charged money and IFTTT did not.

So it was, they had a perfect substitute that cost more money.


Speaker 0: Most of the time, people are way undercharging for their product. For some reason, the idea is out there that you should either not charge for your product or you charge such a tiny fraction of what you could be charging that you're not set up for success. So to give you an example, I've seen startups charge 1 10th or 1 100th of what they should actually be charging for whatever reason. I think there's ideas out there that investors want you to never charge or they, I don't know where these ideas come from, but a lot of the time, the first advice we give to people is to dramatically increase their prices as fast as possible. A lot of the times, Startups apply to YC saying that they are competing on price and that the way that they're winning versus competitors is that their product is cheaper.

The reason that is so dangerous is you don't actually know if your product is good or it's solving a real problem for people and you could just be getting, trying to get people that want the cheapest possible product. And so if you are charging a fraction of other options for your thing, it could be that you're actually getting bad data about whether or not anyone wants your thing, right? And so that's 1 way that you know that you're in trouble is that your entire customer acquisition strategy is like your product is way cheaper than everyone else's. Usually a good product that we see become successful does not charge less than competitors. It actually charges a premium.

It's because it solves such a huge problem for their customers that they will happily pay a premium versus other options on the market because it's such a great product, right? That's a sign that you've made something that people want is that the market pays a premium, not a massive discount to what other options are. That's a really good sign for you. Instacart was expensive. DoorDash was expensive.

Airbnb, I think was expensive. Dropbox was expensive. It wasn't like DoorDash was, hey, we're like other things and we're like a tenth of the cost. That was never the pitch. So I'm sure there are examples of those, but generally speaking of our hugely successful companies, they are either serving a market that has never been served before, and so it's expensive, or it's actually more expensive than direct competitors.

I mean, Zapier charged money and IFTTT did not. So it was, they had a perfect substitute that cost more money. You

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Most Startups Are Undercharging - Dalton Caldwell