Determining how to price a product or service is one of the toughest decisions for any startup. The implications of this decision are massive and will ultimately define a company's brand, funding requirements and long-term viability. To form an effective plan, entrepreneurs need to understand their markets, their customers and the basic pricing strategies used by most successful businesses.
Choosing the Right Pricing Plan
Pricing is a delicate dance that can impact the way customers feel about a product or service. Ask for too much and you may lose the customer's interest. Ask for too little and you leave money on the table, while potentially devaluing your product in the eyes of consumers. Among the most common pricing strategies, include:
Premium Pricing: With this strategy, businesses set costs higher than those of their competitors to enhance the perceived value of the product or service.
Economy Pricing: This technique aims to attract the most price-conscious of consumers, while minimizing overhead.
Market Penetration: New companies try to make rapid market inroads by charging lower prices to attract attention from competing products or services.
Price Skimming: This involves setting prices higher during the introductory period and gradually lowering them when competitor goods or services hit the market.
Bundle Pricing: Small businesses group products together and sell them at a lower rate.
Psychology Pricing: This strategy attempts to make the customer engage with a product or service on an emotional level.
Successful entrepreneurs perform countless hours of research to settle on an ideal pricing plan that provides consistent revenue, while reinforcing their product’s value. If you want to nail down the right price for your startup, you will need to do the same.
Where to Start
Market research is the first step toward finalizing your prices. Begin by researching the prices of similar goods or services. If you operate in a well-established market with ample competition, you may not have much leeway unless you can offer something that sets your business apart. On the other hand, if competition is relatively light, you should definitely factor this into your pricing strategy.
Cost of Goods Sold
To make a profit, you will need to charge more for your goods or services than what it cost you to develop or acquire them. To come up with this number, add up costs related to overhead, labor, marketing, deliveries and anything else that goes into the creation or selling of your product or service.
Considering Your Customers
For most startups, this factor is most critical to developing an appropriate pricing plan. Begin by determining why they would want to buy your product. Does it provide a solution to a common problem, or is it a luxury item they can do without? How much disposable income does your average customer have, and do they have the potential to become repeat customers? You should also determine your total addressable market (TAM) by multiplying your total potential customers by a potential selling price, with the understanding that fewer relevant customers will require a higher average revenue per customer.
Other Things to Consider
In an ideal situation, you will be able to test out your pricing structure before your product or service hits the market. That said, remember it is usually much easier to lower prices than to raise them. However you start, be sure to collect and maintain comprehensive data, so you can analyze what works and what does not.