I’ve been thinking – what should I think about when I’m setting the price for my product? How do other start-up founders calculate the price they charge?
Pricing seems like a real mystery to some companies. Many seem to price their products according to market prices for similar items. You know, charging what their competitor charges. Does this make sense? I suppose it does for a commodity product – gasoline is gasoline? But what about for other types of products?
Another popular pricing strategy is activity-based pricing. This is when the company adds up all the costs associated with making one unit of the product, accounts for overhead, adds the desired profit margin and that’s the price they charge. But where is the customer in this approach? Are we to assume that customers are just price takers – agreeing to whatever price companies place on their products? Is that the way you shop for things? I don’t. So, are there other ways I should think about the price I charge for my offerings? Maybe.
Warren Buffett has this take on pricing.
“Price is what you pay. Value is what you get.” – Warren Buffett
This quote seems to imply that there is some relationship between the price a company charges and the value the customer receives in exchange. But how do we know the value that customers get from the product? Can we possibly know this without deep conversations with them?
I don’t think I can understand the value of my products from my office. I don’t think I can understand their value from the internet or from watching my competitors. I think that setting a price might require more work and a lot more thought than I realized. And I think it might be a more like science than art.
What do you think?
Until tomorrow, GUNG Ho friends!