When you are first starting out, it’s very common to look at your competitors and their similar products to try and decide on a price for your product. It’s not necessarily a bad thing to consider the competition. The next thing that naturally occurs is wanting to try and price your similar product at a lower cost than your competition. This is where you start heading into a risky area… building your business model on a foundation of “cheapest price” is a hard model to sustain in the long term. You must build your business on more than that.
Let’s go over some reasons why a low-price-model isn’t the best solution…
First, if you start competing on price, you will always find someone willing to sell something cheaper than you. Price dropping doesn’t just happen once. You will find that you end up having to drop your price multiple times to try to keep up with the other, cheaper competitors. You will eventually drive your price down so low that you can’t find any profit in selling your product.
Secondly, you must think beyond simply the cost to build the product and your profit from that. There are also other factors, like employees, time for billing, customer service, etc. You have to keep a profit margin that allows you to pay for the other aspects of the business. If not, then you will end up either building future products at a lower quality level (to try and trim costs) or you will cut back on the quality or availability of your customer service. Either of these options will end up driving away your customers.
Third, if you price items too low, it can affect your brand’s perceived value negatively. A product that seems too cheap for the value it presents can cause customers to be hesitant to make a purchase. If the price seems too low, there’s a chance that they will consider your product to be inferior to another. Make sure your product’s price matches the quality and value that is behind it.
Lastly, when you are no longer pricing the lowest, how do you convince customers to buy? The key here is to provide some sort of unique value. A value that sets you apart from your competitor. Perhaps you use better materials. Or maybe you offer an artist/designer exclusive that no one else has. Or maybe more than anything, you provide top-notch customer service that goes well beyond what your competition does. Whatever you decide upon, make sure that your product brings something special to the industry.
All in all, if you think creatively and work hard, you can make a great product and sell it at a profitable margin. Try and picture yourself as the customer. What would you want in a product like this? How would you want to be treated by the company? What do you see that’s missing in the industry, that you wish someone would offer? Think about these things, be smart, and you can really make your product & profitability shine.
Coupon Image Credit (cropped and pricing added) – bigbrand . , Flickr