Beyond using price as a marketing technique for separating your product from those of your competitors, Mullins says setting the right price is also an effective way to build cash flow. "A critical goal for a start-up is to grow quickly," he says. "It's more difficult to raise cash from conventional sources such as banks and venture-capital firms when the business has no track record. So the goal should be to price your product at an attractive margin."
But take a hard look at your long-range goals before deciding to price your product based on margin alone. You need to first ask yourself whether you're trying to increase profit margins or market share, Stearns says. "If you're solely interested in boosting profit margins rapidly, you'd do better with a higher price," he says, "but if your goal is to build a big company and capture market share, you'd do better with a lower price."
Long-term growth and increasing his market share were certainly goals of 29-year-old Burtch Maruflu when he launched Xodiac Technologies in 1996 to promote iCatch, an in-house product display system. Maruflu didn't actually start producing his electronic displays, which are sold to mass merchandising chains, banks, trade show exhibitors and retail stores, until February of 1998. Unlike Rayes, Maruflu didn't have to worry about separating himself from his competition--because he had virtually none.
Unlike gigantic outside signs that flash messages at passersby, Maruflu's products are 25-inch or 40-inch portable displays meant for indoor use. The device can alternately flash three different messages, and the graphics can be changed.
Maruflu was right in assuming his product's uniqueness was the engine driving its market appeal. His prices of $499 for the 25-inch system and $799 for the 40-inch version were based on production costs, i.e. mass-production methods that yield volume production and maximum margins, as well as what he thought his customers could afford to pay.
A significant part of Maruflu's pricing equation was determining what its potentially broad customer base would pay for the display system. "Since our customers range from large corporations to smaller businesses like banks and small restaurants, we were careful [to create] a price neither small nor large companies would question."
Indeed, while production costs are critically important, it's your potential customers who ultimately decide the price of your product. "Most start-ups face some kind of competition," says Mullins. "You have to assume someone is already satisfying your potential customers' needs. It may not be with the same product, but it could be something pretty close. You must give serious thought to what customers are already paying for a similar product, compare the benefits of your product, assess what you think they'll pay for it, and then charge them as much as you reasonably can for its differences."
Fee for Service
Pricing a product isn't easy, yet pricing a service is harder still because you're dealing with an intangible, according to Stearns. "How you price a product you can see and touch is a lot easier than pricing a service, where value is often not immediately apparent," he explains. "You often have to work harder to convince people that the price they're paying is a good one."
Nonetheless, Stearns says that the principle of connecting high price with value and quality also applies to pricing a service. "It doesn't really matter whether it's a computer repair, accounting or management consulting service you're pricing," he says. "Customers associate a high price with quality."
Stearns offers these principles for pricing a service.
- Identify target customers, and find out what they have paid or what they're willing pay for a comparable service.
- Determine your true costs. Many entrepreneurs mistakenly discount their time. "They consider their time as free when they should be factoring it into the total amount of time consumed by a client. That includes travel expenses such as tolls, auto depreciation and the time it takes to get to and from a client's location," says Stearns.
- Be flexible. It's always best to price high and then lower the price if the situation calls for it. "It's always best to give your price some leverage," says Stearns. "This can't be done if you underprice your service." To capture a client, for example, Stearns says you can offer a volume discount if the client wants you to repair several machines or provide the identical consulting service to several departments.
Whether you're pricing a product or service, one thing is sure: It will have a lasting impact on your business. Don't approach it lightly, or you could be sounding the death knell for what could have been a successful venture.