When you start a company one of the key questions that always comes up is: how much do I charge for my services/product?
Pricing is an art form. One of the main mistakes a founder makes is offering everything for free at the start. This could help collect some early feedback, but that’s not always the right approach. Here is why it’s important to know your value from the start and how to price the product correctly.
Asking for money from strangers
A lot of entrepreneurs feel uncomfortable with asking money for their new product. After all, “it’s still in Beta”… And, the feedback is so useful… And we want the customers to stay, right?
Not exactly. While all of the above is true, it does not reflect the economic reality. Economics 101 – you get money for a product/service that you provide. The more useful that product/service is to the customer, the higher the reward. It could also be that the product is scarce. Then the reward is high as well. However, nowhere does it state that someone can merely walk up to you and take your product for free.
The same applies to any startup. You may have a freemium model, but at the end of the day every business must make money. There is nothing wrong with asking someone for their cash in return for the product that you spent time building.
The danger of offering the product for free is that you would attract the wrong customer. A lot of users look for cheap tools or freemiums, and would never spend more than $10 on a product. If you are looking to develop a premium service, or even a basic subscription that costs $15-20/month that’s not your target customer. Collecting feedback from these users would mean tailoring your pricing and product to the customer who won’t pay for it.
Hence why it is very important to: a) identify who your customer is, b) start charging the optimal price for your product right away.
The next question is, how to price your product the right way.
Pricing the product
This is going to sound obvious, but you need to make money from your product. Therefore calculate how much it costs you to make/maintain (if the product is software – so no inventory cost, but hosting etc. should be factored in) a product, and use that to determine how much the customer should pay for you to make a profit.
As the next step, do your research and look at the market. Find a product that is similar to yours that sells to a similar type of customer.
Example: You are selling phone cases. You look at how much an average case costs online. Looks like other vendors price it anywhere between $25 and $50 depending on design and quality. You also find that some cases are sold for $80-120.
Your cost per case is $10. The above looks like a good return on investment, so you proceed with one of the following options.
Option 1: You know that you can optimise your website to get to the top of Google search and you also bet on your design quality to be superior to others. You make 5-6 designs, and you go for an average user who would pay the $25 price.
Option 2 (riskier): You figure out that you want to sell it to artists who want their accessories to stand out. You decide you want to aim for the premium market. Instead of selling the $25-30 cases you go for the premium $115-130 price. In each case (no pun intended), you will then need to test out your hypothesis by driving traffic to your product page.
Testing out your price
When deciding how to price your product, testing is key. Once you bring an X number of users to your page, figure out how many of them: bounce (leave right away without viewing anything), add your product to cart, checkout (pay). Each of these steps could indicate if there is anything wrong. If you are showing price at a point where products are added to the cart, and no one is checking out, chances are, the price is too high!
If, users are browsing your products before seeing the price, but not adding them to cart – something might be wrong with the website functionality/quality. Knowing when it is price-related is half of the job done.
If you have users buying from you regularly, you could also decide to hike the prices. If the price hike results in 5% of users leaving, that’s a good result. If, however, 50% of your users leave or start calling you about it, chances are it was a misstep. You need to have your hand on the customers’ “pulse” the whole time, in order to price your product right.
One other thing you can do is cut prices by packaging things together. Apple are a master of this craft. Whenever they acquire a company, it often results in them packaging that company’s product into their existing catalogue for Apple customers.
As per the above example, if you are selling phone cases, maybe offer a case + a sticker, or other products that you could bundle together. Play the deals game, although keep in mind that price wars can get…pricy.
Another option to try is to have a “pre-order” list. See how many users would subscribe to it to get a “discounted” product. While some customers on the list would be people looking for deals, it will still be better than offering the product for free. You will also get to test out your pricing strategy that way.
To sum up, when it comes to how to pricing your product: do your research, know your market, test your pricing and don’t be aftraid to charge for it.
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