Pricing is the valuation of your product or service. Arriving at one is a healthy combination of art and science. There are over 10 different methods you can assign to figuring out your product pricing model, however, without looking at the variables that go into creating your product, you run the risk of creating problems for your product in the future.
Know your costs
Whether you’re creating the latest and greatest time saver app, manufacturing tools or harvesting produce to sell at a farmer’s market, costs have been incurred in the process. Fixed and variable costs such rent, labor, any debt or loans on equipment and distribution/delivery costs are the basis for knowing what you need to recoup. Create a list, meet with your accountants (or accounting department) to develop an understanding of the costs needed to recoup. What mix of margin percentage and customer acquisition volume is needed to get to profit?
Assess Market Size
Who are your customers and how will you reach them? Creating a list of basic demographics of your product’s customer will help drive estimates of sales, as well as where you’ll need to focus marketing/accquistion efforts.
Look at your competition’s price points. Identify where their strengths and weaknesses are in the marketplace. Run your own scenarios based on their price point. It’s too hard to reverse engineer a pricing model. Identify where your product or service wins and loses based on comparisons with other products out there.
Know your product’s differential points
This is where your products perceived value will come from. When customers recognize the value, it will drive customer acquisition.
Look at what the market will bear
After looking at your competition in the space, where is your product landing? Are you positioning to be a premium brand in the market, or on the value end? Depending on where you want the product to land, is the value proposition to the customer enough to drive a higher price than the competition – or lower to undersell it?
Listen to your customers
Maybe you’ve done a beta period with your product, or if you’ve been operating for a while. Create a customer advisory group. Offer these customers something for their time and feedback. Encourage open conversations about how they’re using your product and value vs. cost to them. Be prepared for the good, the bad and the ugly. By offering to participate however, these customers have taken an interest in your product’s success, so take time to analyze their feedback.
Try Tiered Pricing
Tiered pricing will give you a sense of where the largest interest lies for your product. If you’re not sure you want to offer everything at one price, a test of a tiered scenario could quickly allow you to see what value customers are willing to pay at what price point.
Pricing changes over time due to supply and demand, other emerging products and technology, or market conditions. Your business is an ever changing entity, and innovation and growth come from being proactive (as opposed to reactive) in your marketplace.
Here are some pricing strategies people love. (I found it a better read than listen).
What are your best tips for creating a pricing model?