How To Price Your Product Correctly

Setting the right price can determine if your product will be a success
Setting the right price can determine if your product will be a success
Image Credit: Allen

When I talk with product managers, over and over again I hear that the one task that they all fear the most is setting a price for their product. I’m not 100% sure why this is such a big deal. I guess the obvious answer is that a lot of us feel that if we do this incorrectly, it will heavily contribute to our product being a failure. This is a valid point, but I’ve never viewed product pricing as being that big of a challenge. I think that it’s pretty easy to do correctly. Perhaps I should share with you how I go about creating prices for my products.

Finding The Floor

One of the first things that I do when I’ve been asked to come up with a price for a product is to take some time, look at the product development definition, and find out how much it is costing the company to create this product. I call this price the “floor price”. It should be pretty obvious, but when you set a price for your product you are going to want to make sure that you don’t price it below the floor price or else the company will be losing money with every sale.

Finding out what your product’s floor price is can be a bit tricky to do. The reason that this may not be a simple task is because you are going to have to take a careful look at all of the steps that your product goes through and all of the hands that it passes through. Yes, there may be the initial construction of the product – that’s the easy part to determine the cost of. Next comes accounting for storing the product after it’s been made, shipping it to the customer, and potentially the cost of installing it on the customer’s site. All of these tasks require both people and time and you need to determine how much they are costing the company. I have no problems erring on the high side when I’m creating a floor price – I don’t want to allow the company to cut their prices too low. Get this right and it’s the type of thing that can go on your product manager resume.

Looking At The Competition

I’m always amazed when I am working with product managers who are trying to price their product and they come to me and tell me that they have no idea what their new product should be priced at. In this life, there are very few “new” things and so there is a very good chance that somebody somewhere is selling a product that is comparable to this new product that you’ve just created. What that means is that they’ve already done the hard work and come up with a price for their product.

All that is left for you to do is to find out what they have set their price at. This is never an easy thing to do, but the good news is that it can be done. The right place to start is with a Google search. If that doesn’t provide you with the answers that you are looking for, then you’ll need to pick up the phone. What you’ll want to do is to call people who’ve already bought the product and simply ask them how much they paid for it. You’d be amazed at how often people will answer this question without a lot of prodding. Once you have this number, you’ll have a starting point for what the market is willing to bear for this type of product.

What’s Your Real Value?

One of the things to keep in mind when you discover what your competition is charging for their product is that they may have gotten it wrong. They may have priced their product too low or too high. What you really want to discover is what the correct price for your product is (and this price had better be higher than your determined floor price or else you’ve got a losing situation on your hands).

What you need to determine is the true value of your product to your customer. You need to understand that right now they are making due without your product. How are they accomplishing what your product does without your product? Generally, there will be multiple people or machines or forms or whatever involved. You need to understand how the thing is getting done and then you need to determine how much this is costing your customer. Once you understand how much they are spending to do what your product does, you’ll have a very good understand of how much they will be willing to spend on your product to do the same thing.

What All Of This Means For You

Pricing is often seen by product managers as being a very scary thing to do. One of the reasons that we see it this way is that despite it being a key part of our product manager job description we’ve never really been trained on how best to do it and so we fear that we’re gong to do it wrong and that will be the end of our product. It turns out that we really shouldn’t be worrying that much. Instead, we need to understand that product pricing is a fairly straightforward process.

The first step in creating a price for your product is to determine what the floor price for the product is. The floor price is the cost to your company to create, store, ship, and install the product. Once you know this value, you’ll understand what value your price can never slip below. Next, you need to take a look at the existing market and find products that are equivalent to your product. Once you know what these products are priced at, you’ll have an understanding of what the market will bear. Finally, you need to determine how your customer is getting by without your product. What is the cost of doing what your product can do for them? This will accurately reflect what they should be willing to pay for your product.

Pricing should not be a big scary thing. Instead, as product managers we need to view this as simply being yet another one of the tasks that we need to take care of in order to help our product become a success. Follow these three steps and you’ll be able to determine what the correct price for your product should be.

– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Product Management Skills™

Question For You: How long do you think that your should stick with a price before the market tells you to adjust it?

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What We’ll Be Talking About Next Time

By now I would think that you’ve heard about the so-called “cord cutters” who are out there. If you are a product manager working for a cable company these people are the bane of your existence. The cord cutters are the people who have decided that they no longer need to subscribe to cable television and so they are canceling their cable TV subscriptions. These people still want to watch TV, just not cable TV. They will keep their Internet subscriptions to Netflix, Hulu, etc. Just not traditional cable TV. If you were a cable TV product manager, what could you do about this bad trend?