You would think that after all the hard work of building a product that slapping a price on it would be the easy part. But the truth is that finding the perfect price is difficult, and it can make or break your product’s success whether you’re pricing too high or too low. So let’s be like Goldilocks and try to figure out how to find the price that is just right.
To start, it’s a mistake to think that price is something you should only bring into the conversation after the product is made. It’s a very natural impulse. You can’t know how much something is worth until it exists, right? In reality, the logic needs to be flipped. You can’t know what your product is until you know how much it’s worth.
In FirstRound’s latest piece on product pricing, they put a heavy emphasis on price before product. They highlighted the point that “new products fail for many reasons, but the root of the problem is the failure to put the customer’s willingness to pay (WTP) for a new product at the very core of product design.” You can’t just hope that something will make money after you’ve made it. You have to know it before you even start the process of design.
Start by speaking to the people you’d like to reach and asking them if they’d buy the product you want to make. Chances are if you don’t tie a specific number to it, they will probably just say yes. So follow-up by asking if they’d buy it for a very clearly defined price point and see what happens.
In our daily lives, we’re always making these sorts of cost vs. benefit calculations. “Is it worth buying lunch today or bringing something from home, etc.” Putting a clear price point in front of someone should bring things into sharp focus quickly because we’re all pretty experienced at judging whether something would add value to our lives.
But willingness to pay is just one factor to consider. You’ve also got to assess actual profitability with respect not just to the monetary cost required to create each individual product, but the time and energy it would demand too. Throw pricing effectively against your competitors into the mix too, and it can be difficult to land on a number that actually works.
More often than not, startups are vulnerable to underpricing, rather than overpricing. We all want whatever we’re making to sell, and it’s very easy to make profit the least important part of the equation as long as you’re getting the product out in the world. Surely things will change once you’ve established yourself, right?
Many companies take it to the extreme end of the scale. They sell their app for free to try to build an audience with the hope of welding some kind of revenue stream into it down the line. Sure, it works for some, but there are so many cases of companies who created something that was clearly valuable to people and still failed to make money. It’s because they had no idea what their product was worth, and it’s exactly the fatal mistake that even a huge brand like SoundCloud fell prey to.
Audience building is great, and getting your name out there is better, but ultimately this stuff needs to make money if it’s going to succeed. Your time and energy are valuable and a failure to profit because of a poorly thought out price is just a waste. At least if you don’t adjust accordingly when you move into your next venture.
Over-pricing has its own set of pitfalls, but at least it sends a clear message that you have confidence in your product. Sometimes the story that a high price tells is enough to get people to buy it. Some people are even willing to shell out $8000 for an umbrella because of the sheer status and prestige its price tag accords.
While you can’t rely on dazzling people with price, there’s still much that can be gleaned by overpricing your product. If people just aren’t biting, ask them why. Ask them what would make this product worth the price of entry, if anything. If you don’t learn anything valuable, maybe that means you need a new product.
If nothing else, don’t get yourself in a situation where you hate working on your product because the energy you are putting in is so much more than the output. You’re not putting yourself in a good position to make your product better if you, yourself, don’t see any value in it.
It’s always hard to walk away from any kind of money or the knowledge that someone out there is using what you made even if it’s free. But to succeed in the long-term, you need to be able to make those kinds of tough choices.
Pricing is hard. There’s no doubt about that, but everything changes when you land on the perfect one. Don’t be afraid to be bold with price. No one will believe in your product until you can say confidently that you do too.