The first rule of pricing is: “Price the product based upon what the customer is willing to pay… Not what it cost to produce it.” The consumer is buying what the product will do for him/her. The (retail) price is how much the consumer values that item. What the supplier (inventor/entrepreneur) essentially is doing is extracting the difference between the cost to produce and that “consumer product value”… This is also known as profit!
But how do you figure out a price “starting point” on a new product? What I’ve done successfully in the past is: 1) Find where the competition is for a similar product. If the next closest similar product is (ex.) $20, then figure your new and better “mouse trap” can fetch $25 (20% to 25% higher). 2) Then, work your production cost backwards from the $25 retail price to figure out your maximum cost to produce the product.
Generally speaking, the maximum net production cost (labor, raw materials, packaging, shipping boxes, etc.) should be about 20% of the retail price (assuming you’re selling through a retailer). This should generate enough revenue to cover you, your overheads (Advertising, G&A, etc.) and the Reps and Distributors…While, at the same time, giving the retailer enough margin to put the product on the shelf. Therefore, going back to our $25 retail price example, the maximum net cost to produce this product should be about $5.
When introducing a new product, always start with a higher retail price than you think the consumer will pay. You can always lower the price later if it’s too high, but it’s nearly impossible to raise the price once the product is on the retailer’s shelves.
Note from Jeff Gawronski: Paul hits the nail on the head! Those who have a new product invention could have a cost as high as 25% of retail, but any more puts the new entrepreneur in a risky situation. What I have also seen and will touch on in a future post is the greed that takes hold of some inventors. Just because your new product could sell for more and your profit can be larger this is something that should be cautioned. ’Why?’ you ask. The reason is that if your pricing is set high you open the door for a smart business person realizing that there is room to sell a cheap knock off. Make a great product, price it right, gain marketshare and you’ll also make the copy cat products less likely to succeed.
Paul Tuttobene is also an inventor that took an idea (Buck Magnet) and made it a reality. He shares all the highs and lows in a must read book titled ‘INVENT-ONOMICS’ If you have an idea for a product invention before you go any further you have to read this book.
When consulting early inventors on product pricing, I warn them to forget about profits during the incubation stage of market trial. Be willing to spend more per unit for production of limited inventory. Stay within your budget! A limited market test is not for profit. It’s intended to prove customer interest and the price they’ll pay. Once established, your battle is to fine-tune production, cost, distribution, and profit margins to satidfy the marketplace fit. If it don’t fit…you gotta quit!