How-to – Finding the right price for your product
Once your start-up is ready to commercialize its product, you must determine how much to charge customers to purchase the product. In other words, it is time to establish the pricing structure.
Pricing is one of the four main elements of the marketing mix. Pricing is the only revenue-generating element in the marketing mix (the other three elements are cost centres—i.e, they add to a company’s cost). Pricing is strongly linked to the business model. The business model is a conceptual representation of the company’s revenue streams. Any significant changes in the price will affect the viability of a particular business model.
A well-chosen price should accomplish three goals:
- achieve the company’s financial goals (i.e., profitability)
- fit within the realities of the marketplace (i.e., customers are willing and able to pay the set price)
- support a product’s positioning and be consistent with the other variables in the marketing mix (i.e., product quality, distribution issues, promotion challenges)
There are different methods of determining the price for high-tech products.
Cost + profit margin: Add a profit margin percentage to the costs associated with producing and distributing the product.
Rate of return and break-even point: Calculate the unit price: price = unit cost + [(rate of return× investment)÷ quantity sold]. Then determine the break-even point: the level at which sales figures cover related fixed and variable costs.
Market price: Set the price according to the main competitor’s price.
Bidding price: Set the price according to available information about competitor bids and the customers’ opinion of the product’s advantages.
Comparison with substitute products: Set the price relative to products for which it will substitute.
Value-based pricing: Set the price based on how the customer values the product. (See below for further details.)
Value-based pricing attempts to establish the return generated by the product’s use from the customer’s point of view. How a customer perceives product value, and the actual value the customer receives, can be estimated by identifying:
- the target customer (i.e., their budget, ability to purchase)—specifically, the value can be estimated by developing an application scenario
- buyer motivation (i.e., willingness to buy, the risk involved)
- the product and its complexity (i.e., its ability to meet customer’s objectives)
- distribution (i.e., delivery, support)
Value-based pricing and the technology adoption lifecycle (TALC)
Setting a price in the Early Market involves some guesswork as the product’s value is unproven at this stage. To guide your pricing decisions, determine the:
- customer’s expected return on investment from buying the product
- amount your customer may be willing to pay
- referential price for the new product (this is the price compared to the cost of the total project)
To cross the Chasm and enter the Bowling Alley, pricing must be based on value. To guide your pricing decisions, determine the:
- amount of money your customer is currently losing (see application scenario)
- expected return on investment with the new product strategy, and when the returns will be realized
- return on investment derived from using the product to solve the problem
Finally, keep your pricing model simple to communicate and ensure it makes sense to the customer. If it does not, your sales staff will struggle in the face of other competition.