Have you ever wondered why things are priced the way they are? Why you could get a 16 oz latte at Starbucks for $4.45 and at Mantra, get the same cup of coffee for $5.00? Pricing is one of the most crucial decisions when beginning a startup. So how do you figure out how to price your product? Jay Sherer (‘07), gave three ways to best figure out how:
The first step is figuring out how much your customers are willing to pay for your product. The largest problem, Jay stated, is that people do not overprice as much as they underprice their product. Customers are often willing to pay a significantly higher price for better quality. Take Nordstrom for example: I could often find a similar sweater at Forever 21 for half the price, however I am willing to pay more because the quality is so much better. Believing in the quality of your product is key for finding the appropriate price. Also, this is where surveying customers, and customer feedback is crucial. Ask people directly how much they are willing to pay for your product, and judge the price based on the answers you are given.
Next, figure out how much your competitors are charging for their product and compare the difference in prices as well as other valuable characteristics of the product. Misaligned value is a very common problem that founders face. Consider the $5 coffee that you paid for over the $4.45 coffee. Why are you paying more for the same product? Maybe the coffee shop that serves the $5 coffee offers a more comfortable and quiet environment, or maybe the $5 coffee just tastes better.
Ask yourself what it costs people to NOT have your product. Think about the days when shipping from Amazon took 7 days to arrive plus $4.00 cost in shipping. Shopping off Amazon was not very efficient, if you wanted something fast and cheap. People were then asked to pay $50 a year to get Amazon prime, but the cost of having Amazon Prime was worth the $50.
Investors want to see that your startup is generating profit and continuing to grow. To display the profit , find the total costs and subtract this number from the total sales. This gives the investors an idea of how profitable your company is and the possibility of growth. Discover where your customers find value and build off of that. This gives investors an idea of how valuable your product is to customers and where the future may be heading. My challenge to all of you is to do more customer interviews this week and direct them towards the price of your product. I cannot wait to see how much you learn!