How do you price your product? It’s often a dilemma that startup business is facing.

It’s not as simple as taking your cost, adding some profit and voila. Do you even know what your cost is? Direct materials, yes, labour, yes, then overhead like office, bookkeeper, sales personnel, energy, equipment, interest on loans etc. etc. – you did not even count half of it yet. In meantime you checked, and competition is selling similar product for …this much.

Ok, sales volume, experience in cutting costs, carefully selected over the years vendors and other factors will adjust your price right to the market value. Otherwise you would be out of business before time, when reality checks in.
What if you think you’re worth much more than the competition? If your product is unique, in service, coaching, teaching special skills or enabling sudden high revenue growth in the industry? As a startup with ‘brand’ not developed yet you have to base then your contract on tangible results and guarantee it.

What if you are a designer and you worked hard and long on several samples for the client, only to hear at the end: “It’s not what we were looking for…”. But then you check in few months their recent project and your design stares right at you, only slightly modified. Different author name on it. How would you price your next project then and would you give away any free samples and ideas in initial phase? Would you risk losing a project just because you requested a deposit on your work?

In another scenario you just started a business with great enthusiasm, products are ready, labour is ready, but sales just do not roll into your portfolio as expected. Under time and living expenses pressures, you start to undercut your prices, just to beat up any competition. You know that others charge $500 for this type of product, but you’re happy to temporarily get just a $100, to finally make this sale. One hundred, another hundred, when you eventually want to raise the price, just to at least match your time and costs, it turns out, customer got used to pay only $100, and now the others who charged properly, are scrambling out of their minds to stay in business. Not you or the others are happy in this situation. Bnet says on this subject: “Undercutting your competitors is sometimes perilous; cost leadership is a difficult strategy for small businesses to pursue. Instead, aim to differentiate your product or service.”

So when it comes to basics, you really need a business plan. For those who succeed, it is a living document, often subject to revisions and rewriting. Pricing becomes much easier if you keep a spreadsheet with financial projections that also gets updated. As you go you will see exactly what your extended costs are and from where are you getting your revenues. Dropping then non-paying, cumbersome and low-profit customers, you will determine your exact business niche, where you can make your price right without undercutting others.

Forbes magazine – an authority in business worldwide, gives these 5 tips on pricing your product:
1) Focus on value, not profit.
In the beginning, figure out what your value proposition is and how to quantify it–explicitly–for customers
2) Then again, be sure to make money.
Once you’ve clearly defined customer value, balance the price point against the resources needed to sell the product.
3) Don’t reinvent the price.
Mind the prices for similar products–and don’t stray too far. Anytime you have to change customer behavior, you’re in trouble.
4) Test, test, test.
Intuition is often misleading. Get meaningful customer feedback by pre-selling the product at different price points in different regions.
5) Don’t sell yourself short.
Rather than cut price, convince customers your product has more value. Those improvement costs can be spread over a large volume, as opposed to eating a per-unit hole in profits.

“A lot of people try to give product away,” says Stern. “I find if customers don’t pay, they don’t pay attention.”

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