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How to price your start-up’s product

June 16th, 2014

Five tips to calculate how much you should charge for your product or service

Pricing, the only “P” of the 4Ps (price, product, place and promotion) that will actually generate your company revenue, is one of the biggest challenges start-ups face. Setting the right price can be as important to the success of your business as the product itself. Set the price too low and the business may never be able to cover all of its costs, let alone make a profit. But set it too high and the business may not attract enough customers willing to pay that price. There are many different ways that a start-up company can choose to price their product. Here are 5 tips to help with your pricing strategy.

1. Look at similar products and price accordingly

This may sound obvious but one way to price a new product is by looking at similar products that are on the market already. As long as your product doesn’t have many additional features (or less features), the prices should be comparable. If your price is much lower than a similar product, maybe you’re underpricing the product. The opposite is also true. If, for example, you provide a cloud based file storage service similar to Dropbox (which is free for the first 2GB of space), and set your starting price at €50 per month, you may find it difficult to persuade potential customers to select your product over your competitor. So know your competitors pricing.

2. Cover your costs

Unless your start-up is well funded, it is vital to ensure that the pricing of your product covers all costs, both variable costs (such as the material costs) and fixed costs (such as rent). If you don’t know what all your costs are, it’s going to be very difficult to make a profit with the price you set. For example, if you are manufacturing a bespoke table, you want the price of the table to include the cost of the materials, labour etc used to create it as well as a portion of the company’s operating expenses. Forgetting to take account of the cost of delivery in the price could wipe out any profit you would hope to make on the product. So take the time to identify all your costs.

3. Uncomplicated pricing

It’s very important to keep your pricing strategy as simple as possible. If you are planning on offering different versions of your product, keep it to a minimum. Customers can get very confused when too many versions of the same product are offered. With just two or three versions offered instead, it is much easier for the customer to compare the options and determine the one that best suits his needs. As an example, if you offered just a basic and professional version of your product, it would be easy for customers to see which version would be their best option and select accordingly. But offer 5 differently priced version in each category, and things can get very confusing for potential customers. So keep your pricing simple.

4. Know your potential customers’ buying habits

This doesn’t of course just relate to your pricing strategy, but you must know what your target customers’ buying habits are. What other products or services do they pay for? How much do they pay for those products or services? Do they expect certain things for free? If you’ve carried out your market research as part of business planning, then you should have a good insight into the buying habits of your target customer. For example if your company is creating a social media site similar to Facebook, but plans to charge users a monthly fee, is this something your target customer will bear? Ask the questions of your target customer as early as possible.

5. Select a pricing strategy and just do it

After figuring out how you think your product should be priced, don’t agonize over the decision; just start testing it. The initial price you select may have not been the best choice at first but don’t feel as though it is locked in. Generally it isn’t. Companies will agonize for months over setting prices but it is impossible to know if it is the correct price until you actually start seeing customers putting their hand in their pocket and handing over money to you for your product. And even then you may not be at the optimal price. But don’t despair. Even after charging your first few customers one price, you can still charge subsequent customers a different amount if you were slightly off to begin with. So start testing your pricing early.

Choosing the perfect pricing strategy is never easy and can be a mix of both art and science. You will no doubt change your pricing over time based on a number of factor – market climate, new entries, product availability, to name just a few. No matter which pricing strategy you choose, you should be constantly monitoring your pricing and your costs to ensure you remain competitive and at the same time aiming to be as profitable as you possibly can.

Johnny Harte is a chartered accountant and founder of Number Krunch, a system that helps businesses generate financial projections.

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