When we start building a new product it is easy to fall into a trap that is almost impossible to get out of later: the price trap. This can happen to any start-up and apply to any type of product.

It seems sensible, and totally logical, that to determine the sales price you need to first work out all the product costs and then add an appropriate profit margin.

There’s a classic saying amongst salespeople that all prices are made-up. What they mean by this is a sales price is determined by many factors including a customer’s willingness to pay.

It is futile building a product that nobody will pay for. The challenge for any business is to figure out if they can build a product that people will pay for, cover all their costs and make a profit.

The customer’s willingness to pay for the product must be baked into the requirements from day one. It is a fundamental feature and just as important as any physical aspect of the product.

Mike Maples Jr. (Floodgate Capital) recently interviewed Madhavan Ramanujam (co-author of Monetizing Innovation) who outlined 3 things that successful start-ups do to determine an optimum sales price:

1 – Have the price discussion early with your customers

  • What’s their price range from acceptable > expensive > prohibitive?
  • Have you defined their price range into the product’s design requirements?
  • Can you realistically build and supply the product at their price range?

2 – Think about how you charge, not just what you charge

  • There are many ways to charge customers, are you using the right one?
  • Does your pricing model complement how customers run their businesses?
  • Is the pricing predictable, transparent and flexible enough for your customers?

3 – Don’t settle for a one size fits all product

  • Look at the different segments or customer bases, how are they different?
  • How can you adapt your product for different segments and customers?
  • Does it have ‘just-in-case’ features that add cost and customers won’t pay for?

Mike’s closing advice for any start-up building a new product is service is to price before you build, not after. Wise words. Changing the price later is virtually impossible!

If you want to hear the full interview between Mike and Madhavan you can find it here.

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