Pricing your product from scratch

Remember supply and demand curves from Economics 101?  Toss them out the window.  If your revolutionary new mobile video sharing service is unlike anything the world has ever seen, then how can your customers possibly assign value?  If you’re magically bringing back family photos from the graveyard of broken hard drives, how can anyone possibly put a price on that?  Conventional calculations based off costs and margins simply don’t work here.  Particularly if you’re delivering products or services with nearly zero marginal cost.

Pricing your product – the likes of which the world has never seen before today – is more of an art than a science.  But here are five guidelines to get you started:

Ask your target customers how they purchase a complimentary product or service.  Do they typically buy online or do they require a bit of hand-holding?  Are they accustomed to a la carte pricing or all-in-one pricing?  What price ranges will they accept without outside approval (manager in B2B context, significant other in B2C).   Listen and learn from their past experiences.  Use this as a starting point.

Sign up for competitive products or services and attempt to purchase.  Notice the messaging, website flows, and sales processes.  For more expensive products and services, tap your brother-in-law who works at EMC or example.com and have him speak with a sales rep.  Companies can’t patent their prices.  There’s no shame in using your competitors as a starting point.  Presumably they’ve learned something from their customers.  There’s no need to make all of their past mistakes yourself.

Exploit introductory pricing.  As a new entrant, you can slap the label “introductory pricing” on your first paid product.  Some customers will expect to keep their Year 1 contract terms forever, so make it explicit up front that prices will change.  It’s still difficult to raise prices, but at least you can save against some of the reputational hit while protecting future revenue streams.

Err on the high side.  Pricing too high gives you wiggle room and has many advantages over pricing too low.  You can always lower your prices permanently or temporarily (through discounts, deal sites, and product bundles).  However, it’s nearly impossible to raise your prices – especially once they’re floating out there on the Internet.  People get anchored to the lowest price they see and negotiate downwards from there.  Another benefit is that higher prices imply higher quality in the minds of consumers.  And finally, you don’t need to sell as much.  One of my previous companies priced an iPhone app at $39.99 when the average price in the App Store was under $2.  Some protested the first few days, but our target customers ultimately acknowledged the quality product we offered and bought anyway.  Even without the download figures of Angry Birds, the software became a Top 20 grossing app.

Don’t publish your highest price tier.  While publishing your pricing is always user-friendly and sometimes necessary (depending on your vertical), there’s no harm in requiring an offline discussion for those largest contracts.  If you offer some all-encompassing license with “unlimited” usage or capacity, then your large customer will immediately latch onto it as a starting point and negotiate steeply downward from there.  If there’s no delineation between high price tiers and low price tiers, then impose viable capacity or usage constraints and force the tiers.  You can always remove them later.

 

Follow Steven Dupree on Twitter @MarketFound

6 thoughts on “Pricing your product from scratch

  1. gerren
    November 28, 2012 at 6:32 am

    Good post.

  2. Gareth Stevens
    November 29, 2012 at 8:00 pm

    This is very ephemeral

  3. March 22, 2013 at 10:14 am

    I appreciate the insight with regards to “introductory pricing”. This often goes overlooked for inventor/startup -types.

    1. Steven Dupree
      March 22, 2013 at 2:01 pm

      Thanks Andy. Many of the topics I’m trying to tackle with MarketFound are “low-hanging fruit” for seed stage entrepreneurs who lack data, budgets, and marketers on staff.

  4. March 22, 2013 at 6:39 pm

    Good practical thoughts. Rarely do we have the opportunity to do any sophisticated pricing analysis.

    One other metric that I have found useful is understanding their expected payback period. In several software companies I worked with, we found that a one year payback was pretty well accepted and so priced accordingly such that the client could experience the payback in one year.

  5. Steven Dupree
    March 23, 2013 at 1:14 pm

    Thanks Tom, I agree that a 1 year payback can be a suitable “lower bound” on pricing… however, there are situations (particularly if cost of delivery is ~zero) where you can charge more… varies greatly by industry!

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