While setting the right prices for your products sounds like a simple process, it’s not as straightforward as it seems. As a business owner, you must consider key factors such as researching pricing strategies, tracking how much competitors are charging, and understanding who your potential customers are. After all, determining your startup product price is one of the most essential elements in ensuring the profitability and long-term sustainability of your business.
Keep in mind that introducing your product at the price point means successfully satisfying your customer and laying the foundation for your business to succeed. In this article, we will talk about everything there is to know about pricing your early-stage startup product and identify various strategies you can employ to find the sweet spot between overpricing versus underpricing.
What is startup product pricing?
An ideal startup product price enables your business to be favorably positioned against your competitors. But before anything else, it’s important to note that the price of your product is determined by a myriad of different factors. For instance, having a deep understanding of your potential and existing customers allows you to price your prices depending on how much your customers are willing to pay. It will also allow you to personalize your sales and marketing efforts to be able to reach the right audience.
However, that’s just one piece of the puzzle. When coming up with a price for your startup product, it also helps to look at what your competitors are doing as well as the current economic conditions that may affect your customers’ purchasing power. Startup product pricing aims to find the right pricing structure for a particular product or service. While often overlooked, product pricing is an important process that businesses need to pay attention to to ensure that a business remains competitive.
What is the main goal of startup product pricing?
The main goal of startup product pricing is to ensure that your business can maximize its profits. It helps businesses remain competitive, increase sales volume, and successfully pull ahead of the competition. Another vital part of product pricing is understanding the concept of willingness to pay (WTP).
WTP refers to the maximum price that the consumer is willing to pay for a particular product or service.
We know what you’re thinking. Wouldn’t willingness to pay naturally vary from one customer to the other?
Yes, you’re absolutely right. However, the main incentive when establishing WTP is for you to make an informed decision when it comes to estimating your startup product’s price. It’s rare for businesses to use just one type of strategy to establish the price of a product. Usually, businesses use a combination of pricing strategies to calculate the best possible price for a product or service.
How do you price a startup product?
At its most basic, pricing a startup product involves adding up all the costs of production such as material costs, labor costs, and overhead costs. However, there are a few critical considerations to keep in mind to be able to complete your product pricing calculations.
- Understand your buyers. Regardless of the type of product or service you are offering, it’s imperative for you to understand who your customers are. Having an understanding of your buyers will give you a better idea of how much your product is worth depending on the value that it’s providing your customers.
- Evaluate your costs. The simplest way to determine the price of a certain product is to evaluate its production costs. How would you be able to determine the appropriate price for a product if you don’t know how much you are spending when making them?
- Determine your desired profit. Now that you have evaluated your costs, it’s time to identify your markup percentage. Markup percentage refers to adding a certain percentage to the original cost to make a product in order to come up with a selling price.
- Research your competitors. Researching how your competitors are pricing their products is a great way to better understand the market. Looking at what your competitors are doing can be especially effective if you belong in an industry with a lot of similar businesses as this strategy is mainly driven by direct and indirect competitors.
- Choose a pricing strategy. Choosing a price strategy is important as it provides structure to the product pricing process. There are three main pricing strategies: value-based pricing, competitor-based pricing, and cost-plus pricing. In the next section, we’ll talk about some of the most common pricing strategies used by startups.
What pricing strategies are most common for startups?
It’s no secret that pricing strategy can be a complex process. Along with complicated calculations, pricing strategies also take into account market conditions, competitor pricing, raw material costs, labor costs, logistical costs, and other qualitative information. Fortunately, there are pricing strategies out there that can help you figure out how much you should charge for your startup product. Here are some of the most common pricing strategies for startups:
- Value-based pricing – Value-based pricing is when products are priced based on how much customers are willing to pay for a product. As you may have guessed, this customer-focused pricing strategy heavily relies on WTP. Businesses that use value-based pricing often offer unique and valuable products to their target market. As a result, brands can use the customer’s perceived value to reflect the worth of a particular product.
- Competitor-based pricing – Also known as competition-based pricing, competitor-based pricing is a pricing method that involves setting your prices based on the prices of your direct and indirect competitors. This type of pricing strategy uses the pricing structure of a business’s competitors while also paying attention to general trends in the market. However, the biggest disadvantage to competitor-based pricing is that it needs another business that offers a similar product to work. Without competition, it’ll be difficult for businesses to accurately gauge product pricing especially if they are new to the market.
- Cost-plus pricing – Cost-plus pricing is a simple pricing strategy that adds all the variable costs associated with production such as labor, materials, and overhead. After evaluating all variable costs, a business then adds a markup percentage to determine a product’s final price. Cost-plus pricing is usually combined with another pricing strategy to make sure that companies are selling their products at a reasonable price. If you’re still unsure about how cost-plus pricing works, check out our example below:
Let’s say company X spends $10 to make product A and wants a 50% profit margin when selling it. Through the cost-plus pricing strategy, company X needs to sell its product for $20 to achieve its wanted profit margin.
Like most things in business, pricing shouldn’t be static. Businesses should have the capability to constantly monitor market trends, measure and monitor relevant data, pay attention to buyer personas, and keep an eye on raw material costs. Through the use of pricing strategies, you can get a better understanding of the optimum price that you should charge to maximize your profits and successfully differentiate yourself from your competitors.
Is there a pricing formula that can be applied to a startup?
If you’ve reached this part of the article, then you have probably figured out that pricing takes a lot of time and effort. Realistically, there will be times when you may have to experiment with your prices to be able to figure out the best pricing strategy to use for a particular product. Unfortunately, there is no one-size-fits-all approach when it comes to startup product pricing.
As with all important business decisions, product pricing needs an ample amount of time. While it’s true that there are a plethora of pricing formulas that can be applied to your startup product, it should still be up to you to determine which type of pricing formula would best meet your startup’s needs. Having a practical approach towards pricing enables you to set the appropriate price for your early-stage startup product. Remember, not paying attention to how your products are priced will likely lose you money.
How Kickfurther can help
Now that you have figured out how to properly price your early-stage startup product, it’s now time to determine how you will fund your inventory needs. Fortunately for you, one such financing option is Kickfurther.
In a nutshell, Kickfurther is an inventory financing platform that helps businesses raise money for their inventory needs. Instead of going to traditional financial institutions like banks and credit unions, businesses can tap into Kickfurther’s community of backers to fund their inventory through consignment. Supporters would then be offered a specified rate of return and get paid when a company successfully sells its inventory. If you want to learn more about Kickfurther, visit www.kickfurther.com.
The truth is that there is no all-encompassing approach when it comes to pricing your startup product. Not every pricing strategy will work for every kind of business as each business is unique. For business owners, the best course of action to take is to spend an ample amount of time researching the different types of pricing strategies and decide which strategy best meets their company’s needs.