Ok, I lied. There is no such thing as a simple pricing strategy. Finding out the best price for your products or services is a tedious and time consuming process with uncertain results. There are, of course, a few models to follow that could make your life easier. I am going to present here the simpler ones.
First of all, you need to remember that price is intimately connected with the client’s perceived value of the product. Value is not an absolute notion. Instead, it is relative to traditional beliefs, cultural influences, personal identities and mane other factors. These factors cannot always be quantified, which leaves us with an arbitrary notion of the connection between value and price.
By now you must be confused, so I will try to explain what I am talking about. Rob Walker and Joshua Glenn (http://significantobjects.com/) came up with an experiment to test the added value attached to an otherwise ordinary (and cheap) product. They bought a large number of thrift object on ebay and they hired 200 authors to write stories around them. Do you know by how much the average price of these products increased, when they sold them? No less than 2.706 per cent!
So, the perceived value of these products increased exponentially, when an interesting story appealed to the imagination or the ego or the love of history or the identity of the prospective owner.
As a startup it is impossible to take into account all the cultural factors that may affect the price of your product. Instead, you should initially focus on its direct economic value. Apply the next few guidelines and you will be able to come up with a winning price.
1.Estimate the cost of your product. How much did you spend by the time it launched? How many hours have you dedicated in its production, how many people were involved, for how long? If you apply lean methodology, this cost would have been kept to a minimum.
On top of this, you should estimate the cost of selling the product. How much is it going to cost to bring it to the markets? How much will it cost you to produce it and distribute it to 1000 or 10000 or 100000 people? How much will it cost, if nobody buys?
After you add the above expenses, you should estimate how many people should buy your product in a year to avoid any losses. Then divide the overall costs by the number of people who should buy your product and you will get your minimum price. Of course, this number will not be obvious in the begining. However, repeated customer development interviews will eventually give you a rough estimate of the potential of your business.
Usually, the minimum price of a product is the minimum price+1; one dollar, pound euro, you choose.
2. In order to figure out the maximum price of a product, the easiest way is to locate your competitors. Check out what they are offering and at what price. Find out if they are successful and if customers buy their products regularly. Also, find out whether their segment of the market is similar to yours.
Your maximum price should be the maximum price of your competitors. If you exceed it, you will be placing yourself firmly out of the markets.
3. Take into consideration whether your product has a monetary value or not. If it does have a monetary value, eg. it will bring profits to the owner, you should get a percentage of these profits. For example, if the owner of your product/ service will increase his/ her profits by 1000 pounds per month, you deserve at least 100-200 pounds per month.
This will be another way to estimate the maximum price of your product or service.
4. Ideally, your price will be the average between the minimum and the maximum prices. This will keep your business competitive and will allow you a descent profit.
There are a few things you should take into consideration that do not rely firmly on numbers.
The maximum price may render your product unmarketable but the minimum price could seriously hurt the future prospects of your business. First of all, once you start at a low price it is very difficult to raise it without losing customers. After all, you are the one who set the bar (expectations) so low. Secondly, when the price is lower, the public thinks that also the value of the product is low. This perception may seriously hurt your brand in the future. Thirdly, it will take you a very long time to make substantial profits.
The price model should be thoroughly tried and tested several times. I can assure you that unsuspecting factors will force you to pivot again, and again, and again, until you get it right. Test your price with your EarlyVangelists before you scale out. Do not give out your product for free at any stage, or your business model will not prove itself.
Always remember that the customers will prove your initial hypothesis either right or wrong and they will force you to adjust your prices. In the end, if they demand a price less than the minimum, you will not have a sustainable business. If they accept the maximum price… well, you are a lucky (wo)man.
Just bear in mind Never Ask your Customer to Price your Products.
For more information on lean startup methodology, you could take a look at my other blog posts.