Summary: To price your idea, you need to analyse the costs at various stages of the value line for your product.
You need to now analyse the costs of the Value Line for the product. This is a brief overview, but it ensures that you can eliminate any ideas at this early stage that just wouldn’t be financially viable.
- How much will it cost to create value – for example to get the resources such as raw materials, people and technology required?
- What expense will be incurred to communicate value to the right people at the right level given the Industry Value Line and what competitors are doing there?
- What costs will go into getting the effectiveness of communication right?
- What partners/distributors will need to be paid?
- What will delivery costs be?
- How big is the potential market?
- What’s the buying cycle?
- What price would you need to sell at?
- How many would you need to sell and over what time?
- What costs can you reduce or phase out?
- What’s the downside – how much could you lose?
Look at the price corridor of the mass of users – the prices that most people pay for products of the same form, those of a different form or function but fulfilling the same job. Now you need to specify a price within that price corridor based on the better value you offer, and the difficulty of imitation – a target price that represents a better deal fort he value provided. In some cases the more difficult it is to imitate the more the price can be pushed higher if you have patents a higher price is more likely.
If economies of scale or lots of users are key, and an idea is more open to imitation, lower prices may be more advantageous so the offering can get the maximum userbase.
Do not underestimate a free offering. It’s a law of nature that you have to give to receive, and that given time, you’ll reap what you sow. Look at Facebook and how it’s free use has attracted users. Also, Microsoft, who realised Bill Gates vision – “to get a workstation running our software onto every desk and eventually in every home” in many ways including providing hardware manufactures with an Operating System that was free to end user. Once control of the actual environment had been gained, this allowed Microsoft to control a lot of what went on in that environment.
With any pricing decision, the aim is to create a cost structure which is hard for competitors to match as well as being profitable by streamlining it. Look at Value Creators such as operations, location, raw materials, staff, product simplicity and partnering as ways of reducing costs. Finally, if you still can’t meet the target pricing based on your costs, look at innovations in pricing models such as renting, time shares, part ownership, equity share and so on.