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The Price is Always Right: Understanding Pricing and Making a Profit

Every startup needs to make money, and application businesses are no different. One of the hardest things to do as a business is understand how to price your product to make your customers happy and yet still make a profit. Ensuring that you are offering proper pricing will keep you moving forward and allows you to grow and gain even more customers. All business owners should be aware of their competition. Many business owners may choose to price themselves cheaper than their competition in hopes to gain an advantage over them. While it is helpful in some cases and can result in you gaining more sales, it can look bad for your business. Know what they are doing and how they price themselves, but don’t rely solely on what they are doing to price your products.

What is your Unique Selling Position?

Instead of comparing yourself to your competition with prices, look at the features and benefits of your product in comparison to theirs. Use those differences to figure out what makes it unique. When you have a unique selling position, you’ll be able to market the  product differently and give people a reason to buy your product over others. This will in turn help validate your price.

As a product owner, you have to consider who your target market is and communicate what your business’ purpose is. You also must be able to communicate and market what services you offer. Your USP is key in differentiating you from your competitors and will ultimately be the reason a new customer will buy your product over someone else’s. 

Want to learn more about Unique Selling Propositions? Read our article “What is a Unique Selling Proposition?” 

Understanding The Hard Costs

Every development project from big to small will incur some costs along the way. Knowing where those costs are going to come from. Being prepared for them can make the process faster, more efficient, and hopefully even save you money. 

There are a few ways to make money from your customers’ daily use––depending on your product. For example, if you are creating a SaaS product and you are serving your customers on a subscription basis, they will have to pay you a subscription fee for your product. If you have a marketplace application, then you may take a percentage of each sale to make a profit off of people using your platform. 

On the other hand, you should be able to identify and understand the potential risks you could encounter in selling and pricing your product. If you have a freemium product (such as a cloud based storage solution) where users take advantage of the free part of the service without ever paying for the premium features, then you’ll never be able to make any actual money from your product itself. 

With Consumer to Business (C to B) products, are you charging the customer to use the product or the business to be on the platform? Take UberEats for example. They charge each restaurant a fee for initial setup and hardware for their location and then charge a fee to the customer on each order. They are getting their money’s worth just by charging the restaurant for setup, and then on top of that, they make a profit on each order. Because UberEats can’t guarantee that people are going to use their service, they don’t bank on the order fees but rather pass their costs along to the restaurants. 

Another thing to consider when looking at your hard costs is how long your business can run when you are only breaking even with sales. Ask yourself, how long can my business function without any growth or upwards movement? This all depends of course on the cost to run your business such as paying employees, software licenses, and other business fees versus how much revenue your product is bringing in. 

It’s good practice to figure out at what point you are going to need to expand and have some growth. Are people going to leave your platform because it’s stale and there are no updates or new customers? Know what fees you may encounter and base those prices on how much you’ll be making in revenue. 

This is where customer acquisition comes into play.  

The Cost of a Good Customer

Customer acquisition can be very difficult when just starting out, but just getting people in the door is the first step to any successful sales transaction. Understanding that you’ll have to pay to get that person in the door however is even more important as you’ll need to know how to market to the right people, price your items accordingly, and promote yourself in the proper way. 

One thing most startups will have to do is spend money on marketing. It is nearly impossible to sell a product without some form of marketing to back it up, even if it’s just a social media page. For most product owners though, managing their business and its marketing can be too much to handle, and they often hire someone else to run their marketing campaign and create that plan. 

Your Initial Customers Might not be Your Final Customers

As you draw new customers in and have more people supporting your business, keep in mind that all customers come and go. While some may stay and give you continuous business, your initial customers might not be your final customers. 

If you can prove that a group of people is willing to pay for your product or service, it’s okay if you want to move upstream for your future customers. This just means that your business is growing as all businesses do. You have to start somewhere. If that means charging $1 for your product just to get some sales and get your name out there, then that’s okay––as long as you keep your goals in mind and your path ahead in place.

Types of Pricing 

There are a few different types of pricing methods that all offer different solutions for how to price your products based on cost, value, and competition. They can be broken down as such: 

Cost-based pricing is a method where you base your pricing on your cost of goods so that you create a margin of profit for yourself that is sustainable and will help boost your company upwards. This is the most basic form of pricing and it’s used in every retail store in the world, as they have to make a profit by selling their goods at a higher cost than what they paid for them. This method is best used when the product has a consistent manufacturing price or cost for the business to acquire, service, or run. 

Competitor-based pricing (also known as cost-plus pricing) is self explanatory, you will base your price off of what your competitors are trying to sell their product for so you can be competitive in the market. For example, if Pepsi decided to sell their bottles for $1.75, Coke would price their product to be similar so that they can be competitive and retain their share of the market. Pricing something lower or higher based on your competition allows you to remain competitive and keeps the demand high. While this can be a good way to gauge your price, you shouldn’t solely rely on your competitors prices to determine yours, you still have to take into account costs and other factors as well. 

Value-based pricing is based on customer feedback and is determined by how much the customer values the product. This can be the best way to price for some startups as you will want to hone in your price based on your customers and target market. Also, when you’re just getting started, having your prices validated can help you find the right customers. 

Test Pricing 

The final thing to know about pricing is that it is okay to test out your prices. There is no perfect formula for how to price your product, so test it out at a variety of price points and see what works best. 

Scenario: Say your product or service costs your business $20, and you value it at $80 worth of work. Because you still need to make a profit, you charge $40. You get a huge number of customers and tons of business from that, but you are barely making any money and you aren’t happy with the way your business is going. You are getting business, which is great, but your profit margin isn’t as high as you’d like, and your workers feel as though they aren’t getting paid enough. 

Solution: raise your prices. 

In Summary…

Sometimes, as an entrepreneur, you might price your product or service too low because you don’t always see the full extent of the value of your idea. On the other hand, you may set it so high that your target audience can’t justify spending what you’re asking for, and they may choose to buy from your competitors instead; that’s the nature of the game. 

This is why pricing is so tough. Setting your price too low could mean missed revenue and opportunities on your end, but sometimes setting a high price limits the amount of business coming through your door. So don’t be afraid to test out different prices for your product, finding your target market and optimizing your price can be difficult, but once you are able to do it, you will be well on your way to having a successful product with plenty of happy customers.

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