A big question startups face is how much they should charge for their product. My reflex answer is as much as you possibly can. In his book Tim Ferriss recommends pricing high and then justifying later. And there is little doubt that entrepreneurs and artists just starting out tend to undervalue their services (see Etsy for all sorts of artists charging as little as $10/hour for highly skilled labor).
Thinking about what to charge helps people self-select – potential customers can select themselves in or out of doing business with the company on their own – the company doesn’t have to filter through potentially interested customers. (Thanks to 37signals for the idea). So how does one actually come up with a real price that is feasible for new customers?
A clothing designer wanted to know what to charge for his line of t-shirts and accessories. We first identified the wrong place to start, which is how much the item costs to produce. This seems to be how most people find a price point – look at the cost to produce and multiply by 5 or 10. This is backwards because the price point should be based on the customer’s willingness to pay, which is related to the perceived and relative value of your product.
We came up with a rough estimate of what his ideal customer pays for similar items by identifying the stores and brands that the customer might otherwise shop at. For example, if he wanted to go after the Old Navy/Target crowd, his tshirts would probably have to cost around $10-20. You can only charge that for a tshirt if you’re doing a large volume of business and have extremely low manufacturing and transportation costs. He identified stores like Diesel and Banana and brands like Tommy and Converse as likely places where his ideal customer would shop. That moves the tshirt price towards a $50-75 range and when considering what a store like Gucci or a brand like John Varvatos would charge, we came up with a range of $50-125 for a garment.
Getting a price is the easy part. The harder part is explaining to potential customers the value of your product. The general rule of thumb is that if your product has more value to the customer than the value of their money, the customer will buy your product. You must discover what the customer wants from their product (a good place to start is by listening to customers talk about similar products and then offer your product for sale as a market test) and then offer that value to them.
How would you value a new product other than comparing it to similar products your customer purchases?