One thing every start-up struggles with is finding the right method for pricing a product they’ve just come out with. I’ve used this method to price all my products for the last decade and double my earnings.
My first venture into business I learned a hard lesson about pricing a product. I was 12 years old and mowing lawns. I agreed to mowing any lawn for $20.
I showed up to my first job only to find out the back yard was a half an acre and overgrown! That summer I had 5 regular customers. Each one had a yard the size of a football field.
The reality of pricing a product is that most people just take a shot in the dark and hope for the best. Setting your price too low can mean you’re mowing huge lawns for little pay. Price your product too high and you won’t be able to land any customers. I remembered this lesson when I went into business again.
In 2007 the economy energy industry was booming. Many companies were pricing a product too high for consumers. We followed my secret formula for pricing a product and doubled our earning. This is my approach.
Know your competition. You have to benchmark off your competition. This doesn’t mean you have to beat their price, you just have to establish a starting point.
Identify your brand. What are you setting out to represent? When Apple starts pricing a product, they have to set their price higher than most. Apple is seen by its customers as a higher end, higher quality, product. If they set their price on par with the competition, it damages the brand and they actually sell fewer units.
Given a blind taste test where one wine was very cheap and the other was very expensive, taste testers rated the expensive wine much higher than the cheap wine. Only after the test, did they find out the wine was from the exact same bottle. Higher pricing brings higher perceived value. Don’t be afraid to be higher priced.
Know your customer . Consumers buy based on perceived value. Businesses buy based on their return. Knowing what your customer is buying is critical. For consumers, focus on building your perceived value. When selling to a business, you must consider that they are using your product to make themselves more money. Business needs and consumer needs are very different.
Set an earnings goal ahead of time. Most start-ups make the mistake of setting their goals after establishing a price. These two go hand in hand and should be set together. The more you can make on your product, the few products you have to sell. This means the lower your costs will be.
When pricing a product, you must consider how many units will need to be sold to achieve your goals. Then consider if you’re willing to build that many? If not, you need to raise your price. If you can’t compete with this structure, your business model is broke.
Test your pricing. You can find many services online for split A/B testing, I use CrazyEgg. The most simplistic method of pricing a product I’ve found is Google Adwords. I’ll create two ads, each with the same wording, and point them to different pages on my site. Each page has a different price. Pit different prices agains one another until you figure out which one converts.
Create a discount structure. Once you’re finished pricing a product for full retail, you’ll have to set a discount structure for distributors. The easiest method for a start-up to set a discount structure is to set one price discount that applies across the board for distributors. This is a small discount on your retail price. I lean toward 2-5% here. Then establish a significant discount (10% or more) for anyone buying a certain volume. This volume should be high and only attainable for 20% of your customers. These 20% will create 80% of your revenue. This discount needs to be significant enough to keep them as a customer for years to come.
Pricing a product as a start-up is going to determine if your business model will work or not. This can be one of the most important things a start-up can do. I’ve used this method to price products that earn millions every year. This article is meant to make pricing a product a systematic formula that you can apply time and time again.
What products are you pricing?