You get what you pay for.
We’ve all heard it, and while this old adage sometimes rings true, it’s not always the case in today’s digital world.
Sure, you’ll always find some people dead-set on the idea that the best products are priced on the high end, but recently, consumers have stopped assuming the price point directly coincides with a product’s value.
Instead, they’re comparing their options and trying new products that are more affordable, making pricing at a higher level a risky gamble.
So where does that leave you? You’ve created a great product that you’re ready to launch, but you don’t know how to price it.
Classify your price points
There are two paths you can take in terms of product pricing: the high end or the low end.
If you’re adamant about sticking to a higher price, only large enterprises with sizeable budgets will be able to afford your product. And while this pricing model can lead to a larger paycheck, there are a few serious risks to this route — especially for a newer company:
- A lack of credibility: Most big companies don’t look for cutting-edge products. Rather, they look for established brands with a proven track record. If your product or company is new to the market, you probably don’t have enough credibility to land a deal.
- Extended onboarding time: If a large corporation purchases your product, the onboarding time is usually extensive. This means many calls, demonstrations, negotiations, and training sessions, which could take months.
- Late payments: You’ve slaved away for months to land a big client, and just when you think you’re about to cash a check, you get hit with the company’s payment terms. Larger companies often require invoice payments that can exceed 90 days, so you better have money saved up.
On the other hand, pricing your product on the low end of the spectrum makes it more accessible for everyday consumers. Other advantages include:
- Market distinction. Price is a product feature. At the end of the day, companies weigh the cost and benefits of any new product they use. Having a low price point can help tip the scale in your favor.
- Stability. Most startups apply the 80/20 rule, meaning that 80 percent of their revenue comes from 20 percent of their clients. But when they lose a big client, the entire business suffers. With a lower price point, many more small- to medium-sized businesses drive your revenue, which is more stable in the long run. If you lose a client, it won’t rock your entire company.
- Mass appeal. Because you’ll attract a larger pool of clients, you’ll learn how to meet the needs of a diverse client base. You can then apply this information to improve your products, ensuring it appeals to the largest number of consumers possible.
Choose your model wisely
Even if one strategy sounds more appealing than another, you can’t jump the gun and arbitrarily choose a price for your product. You must analyze the market and your company’s unique needs before you make any decisions. To evaluate which option is the best fit for your company, here are a few guidelines you can follow:
1. Validate your product.
To be successful in the marketplace, your product has to be able to compete with pre-existing products. Never allow pricing to become a barrier for early adopters. Once your product is fully tested and validated in the market, you can begin to find the right price point.
2. Consider supply and demand.
One of the most obvious principles to setting a price point is identifying how many people will want your product and how saturated the market is. It seems simple, but many products fail because companies don’t conduct market research. Take the market’s temperature, and adjust your price accordingly.
3. Find your competitive advantage.
Identify your product’s competitive advantage by understanding the unique value in your product and gathering information about a competitor’s product. With this information, you’ll see where your product excels and where improvements are needed. This will help you recognize whether it’s more appropriate to price on the lower end or the higher end.
Whether you’re peddling plastic blocks that turn into a best-selling toy or writing groundbreaking software that could forever change the digital landscape, finding the right price point is essential.
Entrepreneurs must be aware of their market, competitive advantage, and the type of customers they’re hoping to attract to find their product’s pricing sweet spot.