On Jan 21, 2010, at 1:34 AM, Alastair Rampell wrote:
> Hi Everyone,
>
> Just curious -- when you create a product, how do you try to set/test the
> price point? Software obviously has very high (100%!) margins, but I was
> reading somewhere that if Toyota could charge 1% more and keep sales/costs
> exactly the same, they'd make 10%+ more in additional profit (because,
> conceivably, they'd keep all of that 1% and it would go straight to the
> bottom line). The math seems to check out on Google Finance when looking at
> Toyota's revenue/profit, too;)
>
Hi Alex,
It certainly varies, and there is no "one size fits all" pricing algorithm.
I will say that you need to factor in a few things, when considering what to
price your product:
* cost to design, architect, and implement your product (employees,
consultants, supplies & equipment, services, etc)
* estimated cost to market and advertise your product
* size of your target market (you do know who you're aiming at right?)
* budget of people in your target market
* potential $ your product saves
Cost to Build
You most definitely need to factor in how much it cost you to build your
product. Even if you didn't spend a dime to build and promote your product,
your time is worth something (or reduction of income due to spending time on
building your product). You need to factor this into your pricing. If you spent
$1 million to build a software app (oh god, i hope not!) then you're going to
have to jack up the price of the product in order to get a return on your
investment.
Estimated Cost to Market
Like the cost of building it, you need to factor in what it takes to get your
app out there. If you're having to constantly spend money to bring in customers
and you only get a few purchases, you may need to raise your prices in order to
accommodate periods of low purchases. If you only need to spend up front to get
a buzz going, and then it's mostly word of mouth because your app is catchy,
then you can lower your price to keep it affordable while still maintaining a
healthy margin of profit.
Size of Target Market / Budget of Target Market
If you have a very niche specific application, and only expect to make a few
hundred to a few thousand sales, then it would be wildly important to price it
much higher. A caveat to this would be if you had competition providing a
similar product at a lower cost, or your target market has a very tiny budget
to spend on products like yours, in which case you should probably be building
something completely different!
However, if you have a very global targeted market, chances are there is a lot
of competition, and you will want to keep your price competitive (potentially
lower than the competition, but not necessarily, assuming your quality and
feature set is more compelling).
If you have a market who's budgets are insanely high, it may be appropriate to
price it accordingly, as long as you don't come across as gouging.
Potential $ Your Product Saves
If you can save people/companies a lot of money, you can get away with charging
a high price. If you were able to save me $500/mo for some reason, chances are
I'd pay $500 one-time to get that savings every month (assuming you can
effectively convey that your product typically saves more than your product
costs, and you're willing to offer their money back if it doesn't work for
them).
Hope that helps you! Just remember that your pricing is often unique, and it
can be very difficult to make a determination immediately. Trial and error
helps too (just don't change too much or you might piss off your clientele).
-Kevin
--
Kevin Elliott
President & Founder
WeLike, LLC
1600 Villa St #377
Mountain View, CA 94041
[email protected] / www.welikeinc.com
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