As entrepreneurs, our instinct is to build our efforts and hours of hard labour into the final prices of our products or services. It's the result of our original ideas and our perseverance and these factors should be taken into consideration when it comes to pricing, right?
As CEO of a product testing company, I have encountered hundreds of entrepreneurs with unique ideas who are quite brilliant and determined and who have the guts to take a concept and turn it into a business. Most of them stumble with their pricing model. In too many cases, startups with no prior entrepreneurial experience overprice their product. They add the value of blood, sweat and tears into their calculations and factor in some arbitrary multipliers, and the end results are prices that far exceed the amount end users are willing to pay.
In my previous startup, I came up with an original idea, I was first to market, I invested a year of my time developing it and then I tried to retail it at a price point that reflected my effort instead of one the market could bear. Needless to say, the product line did not sell out.
When developing pricing strategies there are several things to consider:
- Determine your costs. Don't over-inflate them, be honest with yourself and base it on fact versus emotion. With services this can be trickier but make sure to factor in your fixed costs and to assign a rate to your time and that of your employees.
- Don't adjust your pricing regularly to compete with each new player in the marketplace. If your price is based on cost plus a reasonable profit margin then don't budge simply because a new competitor has come into play that is selling for a few dollars less. Don't ignore your competition but differentiate yourself through the value you offer rather than a price war.
- Stand out from your competition. Our awards program is a perfect example of this business strategy. There are likely hundreds of awards companies across North America, each offering a similar service at a similar rate. Our business is ranked as one of the most expensive awards companies because we don't do things the way others do. Our customer service exceeds all expectations, our media coverage far exceeds any other player in the market, and our brand has become one of the most highly recognized family awards programs in North America. Gaining this type of notoriety has a substantial cost associated with it and it allows us to stand out from our competition. This results in loyal clients who come back year after year.
- Everyone needs cash flow and likely has a loss-leader product or service to maintain it, even if it is not the most profitable product or service offering. Don't drop this product because its margins might not be as strong as some of your other offerings. Consider it a first step in building customer confidence and an investment in future opportunity. Use this loss leader to wow your client and to exceed expectations.
My job is not to advise clients on their pricing strategies, but I read through hundreds of product evaluations every month. The overwhelming response from our testers when it comes to products that are made by startups is that they are overpriced.
Client acquisition and brand loyalty are hard to come by. If you scare off a customer with your pricing from the outset, you will likely brand yourself as "that expensive company." Remove emotion from the equation, remove the sweat equity, and make sure you deliver value.
Stand out from your competitors with a proposition that clients can't refuse, and you are sure to gain loyal brand ambassadors.