One factor that is easy to forget when you’re in the throes of creating something exciting is pricing. Often, startups and entrepreneurs will make the mistake of thinking that this is an aspect that can be left until the end when the design and costs have been finalized. This could be a huge mistake. It’s important to consider your pricing from the very beginning and throughout your design process and marketing plan development.
The basic premise of pricing is that if you lower your price, you can sell more, but you’ll get less profit per unit. Vice versa with higher pricing, you can get better profit per unit but fewer sales. There is an optimal pricing strategy somewhere in the middle that can capture the maximum of profit per unit times the units sold (ie. your total profit). This all sounds pretty basic, but the scale is not linear.
In particular there are some big jumps up and down with volume of sales if your price is able to get you into certain sales channels that you wouldn’t otherwise be able to crack. Also, the lower your price, the lower your perceived value will be to the customer, which, in some cases, can have the opposite effect of lowering your sales. Sometimes it is the perceived (and not the actual) value that customers are paying for. If Coach sold their bags for $50, they would no longer be a status symbol, and while the actual value would still be there, the perceived value would drop significantly and create less demand for the product.
The first place to look is the competition. Find out how much other products in your category sell for and what differentiates them. How much are the customers paying for perceived value (brand, packaging…) versus actual value (materials, labor…). Where does your product fit. This is a good time for a reality check. A general rule of thumb is that the retail price is between 4-7 times the manufactured cost (on the lower end for commodity items and the upper end for specialty items). If you are clearly out of the range of your competition with the manufacturing costs of your current design, you should get back to the drawing board before spending too much time going down the road just to learn later that you’ve priced yourself out of the market.
Of course, this implies that you should know your manufacturing costs at a relatively early stage. That’s not always easy to do, but there are ways to get a rough idea. If you’re not sure how, get in touch with us and we can help.
Pricing and Branding
Now that you know what the competition is doing, you need to define where you will fit. You should already know your UVP (unique value proposition). How much is it worth? Is your idea so useful, cool, elegant…that you can charge a significant margin over your competition? Will people pay for it? Or is your innovation on the manufacturing side so that you can price yourself just a smidge lower than the competition, taking a good market share with a similar product but cheaper cost of goods or operational costs? Your price and your brand are integrally linked. Know what your story is and stick with your story throughout your brand, including your pricing. Nobody can be the best and the cheapest, you have to choose your identity.
Testing the Model
Once you’ve gone through the first steps, test your hypothesis. There are numerous marketing tools you can use and the relevance of each will depend greatly on the particulars of your product. Focus groups can be a quick and easy way to get a baseline. Of course, as always, reach out to your friends, family, and social network, but take their feedback lightly as their personal connection with you and the product can be hard to overcome to reach an unbiased point of view. Doing a soft launch online through your own website or 3rd party websites can be a great way to get the idea out there and see how the market reacts. It can definitely help you identify if you are much too high or too low. Finally, crowdfunding your product is a good way to validate the price, but you have a little less leeway once you have come out with a sale price in a more exposed public manner.