Why Entrepreneurs Should Explain the Cost of Their Product to Customers

The pricing strategy integrates the cost of the product, its value to the end user and profits

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When an entrepreneur fixes the price of a product, it's set on reflection to the target consumer. This brings its own ethical dilemma and challenges. But do entrepreneurs have an ethical demand to communicate the product price change?

Entrepreneurship is a mix of commitment, unending effort and a summation of calculated risk. It's a constant battle to achieve balance. You don't wake up one day and call yourself an entrepreneur.

And once an entrepreneur has a product in the market, perhaps it's their right to explain the product price. It's not just about giving you the best product, it includes the time and resources used to get the product into the market. Plus, the entrepreneur is looking for profits.

The strategy

The pricing strategy an entrepreneur uses integrates the cost of the product, its value to the end user and profits. But a business can have cycles of peak and low seasons. This prompts the decision makers to take different actions to stop a dip in profits.

For example, if you are selling a luxury product, it only makes sense to a past customer if you lower the price point due to differentiation. Elon Musk, in an email to his employees, defended the consumers' right to receive an explanation if the product price changes.

Maximizing revenue

Doesn't the entrepreneur have a right to price their product as per their needs?

The entrepreneur owns the innovation, labour, hours invested and overhead costs. If so, the entrepreneur can lower the price of a product at their discretion without consideration of past customers. But such an action can affect the future price of the product if past customers wish to resell.

When setting the product price, the entrepreneur must factor in both the current and potential buyers. And using this strategy, the entrepreneur can capture the sensitivity of their customers and maximize revenue.

If the entrepreneur lowers product price without undue communication, the consumer who bought the product at a higher price feels cheated. The question they ask is why did another have to pay a lower price to get the same product I paid for at a premium price.

A question on the value of your product arises if the entrepreneur can offer huge discounts. Is the value of the product lower than perceived making it possible to reduce the price? If so, the customer did not get what they paid for.

A lower price on a luxury product can destroy a brand's reputation. Customers who go for luxury products will cast a blind eye on the price of a product and disregard the cost as long as they are getting a high value from it.

If you use a value-based-pricing strategy, you must explain why your lower price is still acceptable. You must convince your customer the value of your product is not lower, giving you a leeway to reduce the price. For example, Apple's strategy to lower the price of their iPhone was to offer it as an older model.

Product differentiation

What if the entrepreneur needs to put a higher price? If need be, to offer one product at different price points to different consumers, an entrepreneur must use product differentiation and bundling. The entrepreneur must boost the value of their product when they increase the price.

Customers judge the fair price of a product according to the price of a competing product, availability and convenience. Price changes don't go down well with consumers if the reason for the higher price is due to internal business purposes. But if the price change is because of external uncontrollable events, your customer can bear with you. And this can and will happen.

Let it rise

If you must increase the price for your product, let it not be due to lack of effective management. Explain to the customer what convenience your higher price increase brings.

See, the issue is, what grander value are you bringing to the table with your higher price?

Let's face it. Without the customer, you have no revenue and no business. If your pricing destroys your brand, you are out of business. In simple terms, if you don't give the customer an explanation for the price change, they can go.

Your customer deserves to feel important and to get fair treatment. If you value them, they can pay more and this translates to higher profits. And this you can do by increasing their perceived benefits.

The value you have for a customer hinges on your product's price and effective and early communication on any changes. The consumer deserves prior communication on the product price changes from the entrepreneur. But then again, business is about making profits and not about breaking even. Explaining the product price to the customer is the entrepreneur's right.