Inaccurate Design

Pricing your product

Tuesday, 18 September 2012

One of the biggest decisions you have to make when you release your fancy new product is, what should you price your new product?

You should be pricing your product at a price that delivers as much money into your pocket as you can, while still being worthwhile for your target audience.

An example. Imagine you create a beautiful, responsive, hybrid-Ruby-on-Rails-HTML5 web application. This application can be used for the employees to submit their timesheets, and allows you to run reports based on where the hours were spent (I realise timesheets go against the whole startup culture, but I digress). Let’s imagine this application costs you a grand total of $30 per month in hosting, and can support up to 1000 businesses. How should you price your application?

You could pick an arbitrary number, like $10 or $20. This would give you a nice return on your product, even if you only get a few customers. But what is the value that the product delivers to your target market? If a business has 15 employees. They are well-paid employees, at $70 per hour. If you save them 1 hour each, per week, that’s 15 man-hours per week. That’s $1050 per week, or over $4000 per month. What could you charge a customer for a product that will save them $4000 per month?

(I realise these numbers are contrived, but they illustrate a point).

It’s a fine line, and there are a number of factors to consider, not the least of which is how much it costs you to deliver the product. If you find that the value your product delivers is below the cost of delivery, then you have a problem. If you have a competitor who can deliver the same value for a lesser cost, or more value for the same cost, then you have a problem. If you price too cheap, customers may think you’re not suited to their business. Likewise if you price too high.

So what value does your product offer to your target audience?