How to Set Your Prices

Setting a price for your product can be an incredibly daunting task, especially in a large, scaling company.  There are a few rudimentary guidelines that I've found helpful when deciding how to price a new product:

Market Research

First and foremost, what other things out there are 'most like you'.  There may be anchors to at least give you a range or a 'realm of reason'.  Phones range from $25 burner phones, to $1,000 iPhones.  Is your phone more like the burner phone ($25-100), more like the iPhone ($500-1,000), or somewhere in the middle?  Look at the features, benefits, and competitive differentiators of your product/service and decide what side of the spectrum you might be on.

Story

If you price in the median range of other products 'like yours', your price fades to the background and isn't a dominant part of the story your customers tell about why they choose you.  Price far below the average for other 'products like yours' and you become the discount story ("I love this thing, and it's so affordable!").  Price far above and you become a story of luxury ("I know it's expensive, but I want the best.".  It's okay to tell any of the three but know the one that is right for your customers, and brand.

Cost Structure

When I put together a basic business model, I'm trying to understand:

Revenue (Price x Units Sold) - COGS (Units Sold x Cost) = Gross Margin

Less: Costs to acquire a customer (total sales & marketing ) + Get them up and running (install, etc.)

Less: Overhead (running the business)

= Net Profit

Your price needs to work into this model so that your Gross Margin and Net Profit are numbers that you're comfortable with.  Sometimes one matters more than another.  Sometimes neither matter, but often modelling it out helps to understand what the price would need to be in order to make the venture worthwhile.

Your Customer's Return on Investment

If possible (especially in B2B sales), do some basic math to establish the return on investment for a customer buying your product/service.  I've found that a 3x ROI+ for the customer is a good benchmark for when a deal becomes a no brainer (at least from a financial perspective).

For example:

Installing a cashless payment solution at an event will increase sales by 30%, but will cost you $100,000.

Event Current Sales = $2M x 50% Gross Margin (GM) = $1M Gross Profit (GP)

Sales with Cashless System = 2M x 130% = $2.6M x 50% GM = $1.3M GP

$1.3M GP - 1M GP (Previous Year GM) = $300,000

$300k vs $100k investment = 3x's ROI = No Brainer!

There are many other considerations, and tactics but I've found using the above as a starting point to field test pricing to be effective.