Most companies breeze through product pricing without asking themselves several very important, but often overlooked, questions. As a result of their unwillingness to question their fundamental assumptions, most startups get their prices disastrously wrong.
That’s good for you — their failure is your opportunity. With deliberate consideration of your price point and pricing model, you give yourself the chance to differentiate yourself from your competition.
Likewise, choosing product prices is a fundamental first step to developing your company’s specific sales and marketing approaches. Here are four considerations to make when pricing your product:
What’s the value of your solution?
What is your solution worth to your customer? Does it help them save time or money? Does it help them generate more income? You’ll need to analyze the benefit of your solution from the customer’s perspective and make your best attempts at quantifying it.
Sometimes, your solution isn’t everything that your customer needs. They might need to purchase additional products, or perhaps they need to pay for people to be trained or to help implement your solution. Understanding what the total costs for your customer will help you determine your product’s value.
How much does it cost to deliver your solution?
While you’ll likely sell your solution at a loss initially, you’ll want to understand both the fixed and variable costs you’ll have delivering your solution to a customer now and over time. Are there natural break points or clear decreases in cost as you scale the business?
For example, most companies see a substantial decrease in selling cost when they sell additional products to existing customers because they already have an established relationship.
How are your competitors priced?
In general, your competitors have already gravitated towards a certain price point. While you don’t need to sell at the same price, you need to take into account that your customers will use competitive pricing as a benchmark.
Additionally, while your competitors won’t always be right, you should try to understand why they price their offering as they do. There might be a very good reason for it, there might not. You’ll need to judge how best to play in the competitive landscape, but understanding what you’re up against is important regardless of your decision.
If they don’t use your product, what will your customers pay instead?
For many founders, the unforeseen competitor is the substitute product. Your customers may opt to solve their problem differently than by purchasing from you or your competitors. Ride sharing companies, such as Uber, Lyft, and Grab, among others, are viewed as competitive with the taxi industry.
But what if ride sharing customers used their services in lieu of purchasing a car? In this scenario, wouldn’t these companies be in competition with car manufacturers and not taxis? The ride sharing business model is vastly different than their substitute competition’s. The challenge here is to think through all the different ways your customer can solve their problem so you can price your solution accordingly.
Most companies make pricing decisions on a whim, based on a loose understanding of customer preferences and a feel for the market.
Their non rigorous approach is your opportunity. You the four principles above to think through the possible pricing for your product, and make an educated choice.
Will Herman is a contributing writer at Grit Daily. He is the author of The Startup Playbook, an A-to-Z guide for entrepreneurs to launch, fund, and grow their businesses. He’s also an entrepreneur, active angel investor, corporate director, and startup mentor. He has started and managed five companies, resulting in two IPOs and two corporate sales.