I hear from aspiring entrepreneurs all the time who are struggling with how to price their products or services. Here is a sampling of the most common questions I’ve received, along with my typical responses.
Answer: You need to start with two critical bits of information. First, figure out what it costs you to produce each product (including raw materials and labor) and what your overall overhead is (rent, insurance, etc.) Your price must be above the cost of the product or you will lose money on every item you sell – and that is no way to start a successful business! Divide your monthly overhead by the number of items you hope to sell in a month and add it to your product cost. I recommend that you estimate your sales in a fairly conservative manner since your objective here is to find out the price at which you can make money – if you sell more than you expected, than your profit will be greater – and that’s reason to celebrate! Second, find out what your competitors are charging for similar products. If you believe your product is far superior to theirs, you can charge a premium, but you need to be able to explain why your product is better and thus warrants the higher price. If you had hoped to compete with a lower price, but find that your costs are too high to do so, you’ll need to find a way to lower your costs or compete in a different way. If you have developed a completely new product, unlike anything that currently exists, you may find it useful to survey the market to find out what consumers of your product would be willing to pay for this completely new thing. But you still need to have a good understanding of your costs so that you’ll know if the market-based pricing is feasible.
Answer: In the beginning, this is always tough so the best thing is to test what works. If you have experience in the industry, you may have a sense of what folks are willing to pay. If you don’t have experience, look at similar fee for service revenue models as a starting point. From there, you can determine what would play into your long term pricing strategy… you never know, you might be able to flip the model entirely over after running your business for a while… charging a monthly subscription with a high level of customer service (or experience) while others are charging by the hour, project or other retainer.
Answer: Offering a free version of your online subscription service is critical, especially in the early stages of an Internet startup – so keep that option alive! This will help you attract users and get feedback to improve your service. Once customers have tried your service, offering them an upsell to a premium service is a natural step. Not sure what to charge? See what other subscription services are charging – and try to base your price on that. Remember that many of the popular sites today started out completely free but now have a premium/upsell. Examples include Pandora, LinkedIn, and Dropbox; these are all amazing services but they all recognized that it was important to get lots of users before starting to charge.