Hardware Product Pricing Strategies

Product pricing drives design. Pricing impacts branding. Pricing is a strategic part of every decision in product development. With all that, entrepreneurs still often wait until late in the design process to really think about pricing. Before identifying every feature or specifying a single screw, a market-based product pricing approach grounds product development in reality. Before designing, answer the question, “How much should my product cost?”.

Research the Competition

Finding similar products is a basic part of competitive analysis. If you think no product is a competitor or even a partial competitor, just stop. Be honest. Even revolutionary products have competitors. New products introduce a new value proposition replacing or enhancing existing solutions.

Searching for Competition

Finding competitor information is simple. Almost unlimited information is available today. Hardware entrepreneurs do not need to pay consulting companies to develop product pricing strategies. Use Amazon to search for products within your prospective market. Amazon provides hourly updated sales ranking for each category. This information is a powerful starting point for strategy and compass for validation. The research quickly gives you price points at which customer already buy successful products.

When in Doubt, Ask

If you still cannot identify several competitors, ask potential customers what solution they currently use for the problem your product solves. You should not mention your proposed solution. A poor interview could “lead the witness” or reveal Intellectual Property. Find out what this problem costs in definitive terms of time and money. The information is valuable during development. The stories will help shape marketing. Remember, nothing or the status quo is always an alternative solution. Determine the opportunity cost of inaction.

Activity

  • Find 3 direct competitors
  • Define 3 partial competitors

Finding Value

All product pricing is in value based. If you know the competitors, you can know the value your product will provide relative to existing solutions. This anchor is the core of a market-based pricing. The human brain makes these comparisons naturally as a difference engine. Weigh the value of each differentiating feature added or removed. This value is a hypothesis. Customers will validate the hypothesis through interviews, pre-sales, and launch. Temper the value with your marketing strategy.

Note

Costs have no direct relevance to what a customer is willing to pay. Use the initial value hypothesis as a budget to drive design decisions. Validate costs at key stages in the design phase. Product costs should equal 25%-30% or less of the sales price. At this point, rough math invalidates many product ideas.

Product Pricing Strategies

Lowest Price Strategy

Competing against an existing product on price is a traditional strategy of large, commodity business. Competing on price is a difficult strategy to sustain for a hardware product entrepreneur. Lowest price can work when tied to technological innovation and/or dramatic simplification. Unless you have the capital, projected volume, and enjoy risk, do not project high volume cost reductions into pricing. Making cheap products is very expensive.

Penetration Pricing

In a variant to the lowest price strategy, companies will offer special pricing when entering a market. Software companies use free beta releases. Crowdfunding campaigns use early bird pricing. Penetration pricing can cover initial costs, create a network effort, or help test a product. Funding goals partially derisk this strategy.

Luxury or Premium Pricing

Luxury watches sell for $50,000, $250,000, and more. For that price, you could hire someone to tell you time. The phone already in your pocket tells the time perfectly. People buy on emotion. All products have value outside of features and performance specifications. Luxury goods companies offer extrinsic value. Social signaling important to their customers. On a less extreme scale, branding and trust drive luxury pricing strategies. Apple executes this pricing strategy well. While commanding a higher price, they maintain market leading sales.

Monopoly (What the Market will Bear)

Consider disruptive technology. An existing solution sells for $1000 but your solution could sell for $100 profitably. The market could easily bear $400 or $500 gaining the product accelerated growth. Technology makes this pricing strategy a real possibility not only in software but in services and products.

Pricing Influences

Price Points

After researching the market, notice that many products sell at strangely similar prices. At the time of writing this article, each of the best selling home automation controllers are $99 on Amazon. More advanced controllers jump to around $199. Apple creates price bands within their own products. They have a desktop and laptop options hovering at price points increasing by $200-$300. See also “Goldilocks Pricing

The Impact of Distribution

The selling price can roughly double every time a product changes hands. This is known as Keystone Pricing. Understanding distribution strategy is important in budgeting manufacturing costs. The margins are sometimes higher or lower. Planning for distribution margin can give broad reach or sink your company. Here is an extreme example:

  • You pay for $100 COGS
  • You sell for $200 to Distributer
  • Distributor sells for $400 to Retail
  • Retail sells for $800 to Consumer

The Internet makes selling direct to consumers a possibility for entrepreneurs. Fulfillment services provide scale at low margin.

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