You’ve spent a long time developing, building and testing your product. Now it’s ready to be brought to market. Well, almost. There’s still the thorny issue of how to properly price your product.
You’ll be eager to prove to the market that your new product outshines those of your competitors. So your pricing needs to reflect that value, but also be competitive enough to get the attention of prospective buyers. In this guide, we’ll look at how to find the pricing sweet spot for your product or service.
How to properly price your product
When deciding how to price your business’s product or service, there’s a fine line to be walked: Price your product too high and you can alienate prospects (you won’t have the established presence and brand reputation of your more seasoned competitors) but undercutting your competitors in order to establish yourself can be damaging.
Without a healthy profit margin built into your pricing, you risk causing cash flow issues that plague so many startups – and it may be some time until your new company becomes profitable.
If you’re not sure where to begin pricing your product, you’re not alone. This is something that all new companies grapple with when bringing their offerings to market. Here, we’ll explore the art of product pricing and tariffs in order to ensure that your product comes to market at the perfect price point.
Step 1: Understand your offering
A good starting point is to actually grasp what your offering is for your internal and external stakeholders – you’ll only need a paragraph or a few bullet points to summarise. Make sure you establish the product’s name and give a brief overview of any technical specifications.
Product features should be briefly summarised, with the customer benefits clearly outlined.
This will provide a sense of context for your product’s pricing and guide you in the decision-making process.
Step 2: Decide on a pricing method
Good product prices aren’t picked out of the blue. There are specific methods used to determine a reasonable market price for a new product. It’s up to you to decide which pricing method works best for your product and your company.
Below are the four most common pricing methods, along with the pros and cons of each. From this, you should be able to make an informed decision about what’s best for you.
Remember: You need to factor in your cost of goods sold: Cost of goods sold encompasses all the direct costs incurred in bringing your product to market, such as direct costs (raw materials and labour costs) and to indirect costs (distribution and sales costs).
Cost-plus pricing method
The cost-plus method is arguably the simplest way to price your product. You calculate the cost of goods sold and build your ideal profit margin onto this to determine the product price.
While this ensures all your operating costs are covered, this pricing structure can be unreliable because it’s created in a vacuum – it doesn’t factor in other market forces such as competitor pricing and customer demand.
Value-based pricing method
The value-based pricing strategy bases the price of a product on its perceived worth in the eyes of the target consumer. If you choose this method, you’ll need a strong understanding of customer profiles and large volumes of qualitative and quantitative data.
You’ll need clearly-defined buyer personas before seeking out customers for market research. Find out what features and benefits they expect from a product like yours and how much they’re prepared to pay for it. This data can be used to build pricing tiers to ensure an affordable entry point for all kinds of customers (more on that later).
While it takes time and effort to gather this data, your pricing will be much better attuned to your customers’ sense of value.
Competition-based pricing method
Competition-based pricing involves carrying out extensive competitive analysis to match your price points to those of your competitors. This requires a degree of market research, but not as much as with value-based pricing. What’s more, you can bring your product to market knowing that customers are paying the exact same price for a similar product. However, it’s important to keep adjusting your prices in line with your competitors so that you’re on a similar level.
Start by gathering pricing data from other companies with similar offerings in the same market and using it to create an average price point for your offerings that are similar. Once you’ve determined this, you can choose to match your prices to those of your competitors, or position them a little higher or lower.
Dynamic pricing method
Dynamic pricing is tailored to the needs and preferences of your customers. It can alter pricing between different groups of customers (based on location, demographic, sector etc.) and is typically done with machine learning. Time can also be a factor when using the dynamic pricing method. You can see an example of this in action whenever companies have sales at the end of the quarter to push their revenues past their set quotas.
You’ll need an excellent understanding of your customer personas and the changing conditions of your market to use this pricing strategy.
Step 3: Factor in your variables
Choosing a pricing method is one thing, now you’ve got to keep track of all the variables that can affect that pricing. Keeping on top of this helps you make room for a reasonable profit margin and potentially insulates you against cash flow issues. Here are some of the crucial internal and external variables that you’ll need to factor into your product and tariff pricing:
How many people are buying products like yours right now? How in-demand is your offering? Highly sought-after products can command greater prices. But inevitably, as more competitors release their own offerings, marker demand begins to wind down. You may need to adjust your pricing strategy in order to match the ebb and flow of market demand.
Your costs must be accounted for in your pricing if you ever hope to turn a profit. The most important ones are your fixed costs – these are your overheads that’ll remain largely unchanged from one month to the next. Fixed costs include rent on your business premises, employee salaries, and consumables.
Your variable costs will change in relation to your business activities. For instance, if you make a physical product, the components and materials required to manufacture it would be among your variable costs. Other variable costs include marketing, utilities, employee bonuses or research and development costs.
If your variable costs get higher, you’ll need to adjust your pricing to cover them.
Step 4: Set out your pricing tiers
If your offering is something like a software service (SasS) or similar subscription, not all of your customers will have the same needs.
Many businesses, especially those in the SaaS space, tier their prices in order to cater to different buyer personas within their target market. Some SaaS companies operate a “freemium” pricing model where customers can use a basic version of their product free of charge and upgrade when they want to access different features. This can be beneficial for both the business and the customer – customers get to upgrade their package as needed to get value for money, while businesses get an effective way to generate leads and build trust and brand loyalty.
The better you know your buyer personas, the better you’ll be at establish pricing tiers. Customers on each tier need to feel that they’re getting a product that’s tailored to their needs and offers exceptional value.
You can use the same product pricing methods from Step 2 to price the individual tiers for your offering.
Step 5: Nail down your discounts, bundles, and upselling
Your product pricing should incorporate a degree of leeway to allow for discounts, bundles, and upselling opportunities. These can provide an added incentive to new prospects, while also ensuring that customers see more value in staying with you for the long haul.
Whatever pricing method you use, you’ll need to work out a maximum discount that’s allowable for your fees and setup fees. For instance, if your published pricing stands at £2,000 per customer, and your setup fees are £500, you may find that a maximum discount of 10% on published pricing and a 50% discount on setup allow you to be extra competitive without damaging your margins.
Upselling and discounting should be geared towards incentivising a longer commitment to using your service. This can help you to reduce churn while also building value into your relationship with the customer.
You can see how discount headline rates can be adjusted for different tiers and commitment lengths in the table below:
|Sales – Volume Upsell Tools|
|3 Month Commit||Headline Rate||Orig. Price||Discounted Price||Discount value (monthly)||Discount value (contract length)|
|6 Month Commit||Headline Rate||Orig. Price||Discounted Price||Discount value (monthly)||Discount value (contract length)|
Step 6: Carry out tests and reviews
After what seems like an eternity of calculations, market research, and tweaking your pricing, you’ll hopefully have arrived at your definitive prices! But remember that you don’t operate in a static market – your industry and the greater economy are in a constant state of flux, expanding and contracting in line with the technological and fiscal changes that surround them. So you’ve got to be agile!
As such, you should take a responsive approach to pricing, revisiting your prices to ensure that they bring value to your product and your brand.
It’s up to you to determine how often you will review your prices, and measure the impact of changes on your company’s margins. It’s especially worthwhile to keep an eye on your competitors’ prices to ensure that their value proposition never trumps yours. If customers calculate that the value of jumping ship outweighs the value of staying with you, you can expect churn rates to rise.
For more advice and inspiration, join our completely free community, Founders Hub. Talk with like-minded people and see how others are calculating their pricing and tariffs.