patife

Pricing

You built a product. Now its time to make some money. You want a healthy margin, but you don’t want to over charge and ruin the business long term. How to price properly?

One way to do it is to build your pricing thermometer. The price thermometer is the following:

   
  True Value
   
   
  Perceived Value
        
  buyer incentive
        
  Price
        
  seller incentive
        
  Cost
   

Definitions

Basic stuff

More. This notion of pricing using the thermometer is quite static. It’s very important when you want to build a strong brand and product, and a long term relationship with the client. In a dynamic market, it takes time to educate your customers on how to extract the true value of your product or service. Profit is what truly matters, but if you want to maximise the revenue you get at each moment, you may need to do a bit of tinkering in Pricing.

A quite simple and quick way to determine optimal price in a multi-customer setting is to start up and slowly go down. So, you start with a price near the maximum perceived value, say 100, and you get to sell 20 units. Then you drop to 90 and maybe you get 25 customers. You keep going down, and calculating Revenue = Price x Quantity.. At some point you reach a maximum, and that’s your optimal price to maximize revenue. You can do the same with margin of course, what you need to maximize instead is Margin = Quantity x (Price - Cost). Note that in digital software and many online services the marginal cost of serving another customer is zero, therefore maximising Revenue is similar to maximising margin.