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The price you charge for your product can make or break your business. Early stage businesses have slim (and often negative) margins. A small percentage change in price can be the difference between reaching your next funding milestone and running out of cash.

The process to discover the best price for your product is long, but essential. First, you need to decide what pricing model is best suited to your product and customers. Secondly, you have to determine the amount you’re going to charge. Finally, you need to continue to test your pricing, as your product and market conditions evolve.

Choosing a Pricing Model

It’s important to match your pricing model to your product. In order to make repeat purchases, customers need to feel like they’re getting good value. The size and frequency of payments should be matched to the moments when the customer is receiving the most value from the product.

For instance, restaurants charge a fixed fee per meal. Customers usually eat the meal very close in time to when they buy it; and they don’t receive any ongoing or periodic value from the meal. So a fixed fee per unit makes sense.

On the other hand, software is used more frequently by its customers. An enterprise communication tool, like Slack, is used for a few minutes (or hours!) every day – so a small ongoing subscription fee is suitable. 

Your cost structure will also help determine your pricing model. Businesses with high fixed costs (machinery, R&D, etc.) need predictable revenue streams to help with investment decisions – so subscription pricing fits well. High-variable cost businesses, like accounting firms, need to charge a price that reflects the cost to deliver one unit of their product or service – so they use an hourly rate model.

The table below lists some common pricing models and examples of when to use them.

Pricing model When to use it Example
Fixed fee per unit Value to the customer is discrete, at a point in time Restaurant
Percentage fee per unit Value to the customer increases with the magnitude of use Digital payments provider
Hourly rate

High-variable cost businesses;

Amount of work required to produce a valuable outcome is uncertain

Accountant;

Physiotherapist

Monthly subscription

High-fixed cost business; 

Ongoing or uncertain usage patterns

Software; insurance

Your pricing model needs to be reflected in your legal documents. This becomes particularly important when customers request refunds, exchanges or otherwise disagree with how much they owe you. 

How Much Should I Charge?

Now that you’ve chosen a pricing model, you need to decide how many dollars to charge.

Your goal is to price your product in a way that maximises your revenue over time. 

Revenue = price x units sold. 

A higher price usually results in fewer units sold and vice versa. But it’s almost impossible to find the ‘optimal’ price that maximises your revenue. So, what should you do?

You need to consider the factors that will help you determine how to price your product. These include:

  • Cost structure and profit margin: How much do you need to charge in order to make a profit?
  • Target customer: Who are your customers and how much money do they have to spend on your product?
  • Brand positioning: What does your pricing say about the quality of your product?
  • Substitutes and competitors: What customer need does your product address? What is the price of alternative solutions?

Many businesses use customer surveys to help determine pricing. Surveys can be a useful tool but you need to understand their limitations. There’s a gap between what customers say they’ll pay and what they actually pay. It’s better to rely on actual purchase data and then use customer interviews to provide a subjective overlay to your data.

Review Your Pricing Frequently

Pricing should be dynamic. As the factors that determine pricing change, so too should be the amount you charge for your product. Varying your pricing from time to time and measuring the change in sales volume will help you inch closer to your ‘optimal’ price. You can use promotional discounts to run pricing experiments.

While experiments can help you fine-tune your pricing strategy, you should avoid being overly reactive. The appearance of a new competitor with a more affordable product does not necessarily mean you need to reduce your prices. Rather, it should prompt you to zero-in on your product’s unique characteristics and then decide if these justify a price premium. 

Key Takeaways

Pricing is as important to your business as it is challenging. Your pricing should reflect your product, your customers, your cost structure and your competitors. Reviewing your pricing from time to time – as well as running pricing experiments – can help you to find the best price for your product.

If you need assistance with your business’ contracts and legal documentation, LegalVision’s commercial contracts lawyers can help. Call 1300 544 755 or complete the form on this page.

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