This article is a crosspost from Nuwait.
The price of a product can either make it popular or undesired.
When pricing, there are a number of factors that must be taken into consideration, aside from cost.
The value the product brings is interconnected with its price. Despite the many formulas available to calculate the cost and add profit margins to the price, Khalid Al-Mutawa, the cofounder of Studenthub, Plugn and The White Book, believes these don’t matter much. “What matters is how much value does your product/service generate to your target customer, and is your customer willing to pay for that value,” he told Nuwait.
In order to sell a product at first, entrepreneurs need to offer a unique value that will make it different and worth the price. That said, prices should be targeted and tailored for each audience. The price for an end-user product should be different than the price for a business product.
“By researching your target customer, how much value you can add to them, and how much they're willing to pay for it, you could come up with a number and negotiate what price your product should be,” he explained giving the example of Plugn.
Plugn is a platform that helps businesses manage their Instagram accounts. When Al-Mutawa wanted to price his service on a monthly basis, he had to either target small businesses or one telecom company.
If he were to take $7 per month for each account, he would have needed 1,000 customers to generate a revenue of $7,000. He could generate the same amount if he would have signed with one telecom company. The key for him is to know his capacities as a small company.
Al-Mutawa went for individual accounts because approaching big accounts, like telco companies, would require a bigger sales and support team. That was something he couldn't afford.
While Al-Mutawa believes that the cost should be calculated first, then the profit margins should get added to the final price, Yorgos Kleivokiotis begs to differ. Kleivokiotis was the director of ecommerce platform Sivvi.com, and he previously cofounded football ecommerce shop, Koorabazaar.com
His pricing approach was to set a price first, then add the cost. The initial price should take into consideration other competitors in the market and the target audience. Cost, on the other hand, should be adjusted depending on the quality. According to Kleivokiotis, pricing should go through the following checklist:
1. Distribution model: this is when entrepreneurs need to identify if they want to directly sell to consumers or through distributors and third parties. This is needed to ensure there is enough room for all parties to make a reasonable margin. In case the model follows both, “the recommended retail price (RRP) needs to be the same for the end consumer in each case.”
2. Target audience: this is when entrepreneurs need to conduct some research and identify the age group and income levels of their target audience.
3. Brand positioning: this means the price needs to reflect the image entrepreneurs want to convey. He gave the example of clothing line Zara, which is a high-street brand in Europe but a premium one in some Asian countries.
4. Competition: this is when entrepreneurs need to benchmark their products against other brands that consumers will compare them to ensure that the product is not too expensive or under-priced.
5. Future discounts: entrepreneurs must set a slightly higher price, taking into consideration offering discounts during certain sales seasons, or if releasing a newer model.
Prices are always subject to modifications when the cost increases. Planning ahead and assuming market changes will help entrepreneurs come up with a solid price from the beginning.
Feature image via Stockvault.