We weren't sure whether to price high to make our margins or low to gain market share

We were entering the market with our service business and had to figure out how to price: pricing at the top of the market or at a lower price to ease entry and build market share. After looking at different theories, we still weren’t sure what to do. If we entered with a premium price, we’d price ourselves out of 80% of the market. If we went at the lower end to gain market share, we’d barely clear a 12% margin; this wouldn’t be sustainable over the medium and long-term.

The total market was large, so it was difficult to get a realistic view of price sensitivity. Existing competitors were all over the place and it appeared that price was the primary way they were differentiating themselves and attracting customers.

We made a financial model with many different scenarios and decided we needed to get at least 35% margins to have a positive cash flow. If we priced to this margin, we knew that discounts would erode it, so we decided to enter in the top 20% of the market and then offer introductory discounts. The strategy worked.

In retrospect, we realized how difficult it would be to price up if you started with an underpriced service at launch.