Product Pricing

I am getting information together for the first Red Blue Collective presentation. Coming up with an initial topic was simple. The most common question every inventor, maker, and entrepreneur ask is how to price the product they are developing. A complete answer is a more complicated than people would like. Pricing is not costing. Costing is the bottom-up approach of knowing what each element costs. Pricing is what a customer is willing to pay. Distribution plays a large role. Overhead can sully margin. Returns or low yields can devastate profitability. As a topic, product pricing leads the conversation into every piece of the product development process.

Quick Thoughts

Cheap products are expensive to launch. Consider two watches. One watch is $99. One watch is $250. These prices are within normal, market-accepted price bands. Although the watches have different prices, they require the same shelf space (workbench, warehouse, and retail). They cost the same to ship. The teams may have similar overhead. The businesses may have similar marketing. Cheaper means high-volume manufacturing and probably means overseas manufacturing. Although this approach works, international sourcing is a separate challenge. Products have less flexibility for iteration and pivot. Tooling for high-volume is expensive.

Manufacturing costs should be 25% – 30% of selling price. The first reaction from hardware entrepreneurs is complete disbelief. Yes, if you are selling a $100 product, you should produce or buy that item for $25 (with shipping) or less. The entrepreneur needs margin for potential distribution, returns, and losses. The margin must repay development costs and support future development costs.

Account for labor. If you (solopreneur or startup) are polishing, assembling, or packaging the product, you must account for the labor cost. If you are successful, someone else might have to do this work. That person, whether a contract manufacturer or trusted employee, will cost you money. If it takes you 30 mins, it will take someone else 30 mins.

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