The other day I was chatting with an acquaintance. In 2023, he sold his business and moved to Israel.

He lived there for half a year just for himself, then got tired of resting and decided to add some jazz to his life build a new product.

In his niche, there was a clear leader. Good revenue, stable year-over-year growth. And my acquaintance's idea was simple - the same functionality at 30% cheaper.

The strategy was based on the fact that there is a large segment of users who see value in a similar product but cannot afford the market leader's price.

The new product was supposed to capture this solvent demand.

At the start, my acquaintance tested the leader:

- went through the sales funnel
- poked around the software
- chatted with tech support
- read customer reviews

And put together a picture of what MVP and offer to launch


The market is growing.
It's clear what to do.
They built it. Launched..

And over 12 months of sales, they burned a bunch of money without ever turning a profit.

(they would have burned more, but since the party was paid out of pocket, the inner toad came to the rescue)

Why did this happen?

I'll let my acquaintance speak
From here on, close to the original

The competitor sold at $39/month per user. I set $27.

His average check was about $235 (one client = 6 users)

I was targeting $81
(smaller clients, 3 users)

Customer acquisition cost (marketing + sales) - $1100 for the leader, $575 for me

With a gross margin of 70% for him (estimated) and 80% for me (cheaper labor) - the payback period for one client was 7 and 9 months respectively.

Pretty close. I was fine with that

Given the size of the segment I was targeting and the LTV that the competitor wrote and talked about, I had no doubts about the unit economics

But in practice..

My clients churned as early as 7-8 months. While the leader's (as I later found out) "lived" 18-20 months.

So the leader could keep pouring money into traffic.

But I was actually losing money on every acquired customer.


Why did they churn?

Because on average, they themselves only earned for 7-8 months.

After that, the projects they were paid for ended. New ones didn't happen, the "team" disbanded.

The product essentially became unnecessary.

(param-pam-pam-pum)

What I'm getting at..

You need to analyze competitors' prices. But blindly copying is dangerous.

Because price is just the tip of the unit economics iceberg. And if you don't know what's "under the hood" - you can get burned badly.

Like in the example above - didn't dig deep enough into the segment's specifics and bam.

Pricing is a multifactorial thing.

That's the way it is.

#pricing