How to Price a Unique Offering

You have developed a new product, and you want to go to market. You know that you should price above your variable cost of production as a bare minimum, and hopefully your accounting systems are developed enough to determine that. Beyond that, how much higher can you go? How much higher should you go?

There is a lot of news about companies that lose money for years before earning an operating profit while others burn through investor cash and shut down for good only months after their initial funding. We have seen companies price too aggressively in many markets, losing a little on every sale while trying to reach a “tipping point” in the market where they expect that either their costs will fall based on the increased scale or that they will be able to increase prices as more of the market adopts their products or services.

Pricing is Challenging
A lot of factors influence pricing.

With all of the conflicting approaches to growth, there are often confusing signals as to what approach a new company should try. In our experience, it is best to stick to the basics. Make sure that you cover your variable costs in the short run, but also make sure that you have a viable path to covering your total costs before you burn through your investors’ cash. To do that, you have to evaluate how much value your offering provides to customers and quantify the “consumer surplus” that your offering generates. That is, how much can you save your customers if they use your products or services.

Of course, you can’t price to take all of that value. Customers incur costs of switching from their current solution to yours, and the concerns may be more than just monetary, but could also be issues of convenience and even organizational politics.

Each situation is unique, so there is no formula that can be applied to every situation. Research is usually required, but there are ways to reduce the uncertainty. Big consumer product companies have good reasons for spending millions of dollars researching consumer preferences before launching a new product. It is naïve for entrepreneurs to believe that they can evaluate marketplaces without doing any research, and many brilliant technology developers have made the mistake of developing solutions that truly would make the world a better place, but without a plan to make sure that those solutions have a good chance at being adopted. Pricing is a crucial part of a good plan, and it is risky to make too many assumptions. Good technology companies respect the importance of pricing and will apply the same rigor to developing “the right” pricing so that they have a chance to succeed.

Each situation is unique, so there is no formula that can be applied to every situation. Research is usually required, but there are ways to reduce the uncertainty. Big consumer product companies have good reasons for spending millions of dollars researching consumer preferences before launching a new product. It is naïve for entrepreneurs to believe that they can evaluate marketplaces without doing any research, and many brilliant technology developers have made the mistake of developing solutions that truly would make the world a better place, but without a plan to make sure that those solutions have a good chance at being adopted. Pricing e a crucial part of a good plan, and it is risky to make too many assumptions. Good technology companies respect the importance of pricing and will apply the same rigor to developing “the right” pricing so that they have a chance to succeed.

We know that it isn’t about the money. That’s not why we work so hard. We all want to make a difference. This is the stronger motivator that sustains us through the most difficult times. It is nice to be rewarded financially, but it’s not about the money. We have to get the money right, though, to have the impact that we want. That means that we have to get the pricing right. If we do, the customers will be happy to pay a fair price for the value they receive. We can do well by doing good. That’s what drives most of us. Get the pricing wrong, however, and you won’t have a chance to do any good. It’s worth the investment to get it right. Create a pricing plan that includes flexibility and adjust it as needed to maximize your chances to survive, thrive and make an impact.

Published by Alex Galatic

Advisor to tech startups trying to commercialize technology as new products, services and companies. Electrical Engineer, MBA and entrepreneur.

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