How to Price an Invention Part 3
{Don Debelak’s new book, Turning Your Invention into Cash is now available on Amazon for $3.49. Go to Amazon.com and enter inventions Don Debelak to purchase. From the author of Entrepreneur Magazine’s Bringing Your Product to Market.}
Balancing market pricing and cost pricing
Many inventors have a hard time pricing their product. Why is this? It is because pricing your product is a very difficult task—one that takes weighing multiple factors. The two main aspects you need to weigh are cost and market factors. We will deal with pricing in a three part series, with the first part dealing with market pricing, the second part dealing with cost pricing and then the third part dealing with how to balance the two.
So now you know what the market determines for your price and you know what your costs tell you about how much you need to charge to make a profit — now what? Well, this will be easy if your market price is higher than your cost price, because then you can just go with your market price and you should make plenty of money. This is because the market can bear a price higher than you need to make a profit.
The trouble comes when your market price is lower than your cost price. This means the market can only bear a price that ensures you won’t make a profit. Does this mean that your product can’t succeed? No, because you can always change your product.
Your market price will be lower than your cost price when customers don’t value your product enough for what it costs to make. So you have two options, make your product have more value for little extra cost, or have your product keep value with less cost.
For both options, you will need to go back to your focus groups. If your product wasn’t ranked as the top value, what was lacking that was present in other products? Can you add similar features for low cost? Often, adding an abstract appeal is the best way to add value with little extra cost. Can you make your product look fancier or more in-style? If so, that adds value. Another good way of adding value with little extra cost is to provide a more complete solution. If your product needs to be used in conjunction with another product, can you combine the two products to create a high value?
Also look at what product features are not important to customers. If you have a feature that customers aren’t interested in, eliminate it, that will save you money in manufacturing, hopefully bringing your market and cost prices in line. Also, to lower your costs, you can look at sourcing your manufacturing overseas. You will want to still have a way of monitoring quality, but this can be a good option for lowering prices. Before you resort to that, you should find an engineer with experience in manufacturing to look at how you make your product. He or she might be able to suggest some new methods or materials for manufacturing that could dramatically lower your costs.
Another option is changing distribution. If you switch to a distribution system with fewer steps in between you and your end users, you may be able to make the market demands and cost demands line up.
One hidden cost in distribution is packaging. For instance, if you sell to retail stores, you will need high quality, professionally designed packaging. This is a big expense, but one that the distribution channel requires. But if you sell through catalogs, or directly to customers either through the internet or direct marketing, you will only need a package that can get the product safely to the customer. This can be a huge savings.
If you end up making changes to your product, either by adding value or cutting costs, go back to your focus group and see how they rate your product. You will want the rating to stay the same if you cut costs and you will want the value to go up if you tried to add value. Hopefully your value added will be a bigger proportion than your costs to add that value, but if not you will need to employ some other tactics mentioned in this article to bring your market price and cost price in line.
Getting your product priced right is a big concern, because like I mentioned in Part 1, having the wrong price can have disastrous effects. Usually this happens when someone prices their product too low. This can only lead to bankruptcy. I think the problems many airlines are going through reflect this very well. Many airlines are trying to set prices at what the market can bear, unfortunately often it costs them more to run the flight than they make from it. This is the danger of market pricing. But some airlines are staying in business and even doing well, how are they doing it? By using the tactics we talked about in this article. They know that the market demands one price, so they bring their costs into line with this. For instance, if a certain flight (or for products, a distribution channel) cannot be profitable, they drop that flight. Also some airlines have secured fuel contracts that keep their fuel prices under control, thereby making the cost of flying cheaper (like with inventors, finding cheaper ways of manufacturing or by sourcing their manufacturing overseas). Also these airlines evaluate what customers value, and what the customers don’t value they eliminate, along with the costs associated with it. It takes a lot of creative thinking to lower your costs and still keep value, but if you can do this well you will have a much better chance of making a profit.
It is worth while to evaluate your costs no matter what, since it will help you earn a larger profit, but sometimes you will need to really spend a lot of time so that your product is profitable. Some people think that they can get by with a lower percentage of profit, or margin, if they sell more products, but this never happens. The more products you sell, the more costs you have to sell those products, so unless you are charging at least twice the manufacturing costs, you will not make a profit. One of the main reasons Wal-Mart has succeeded is that they know this fact and put it into practice. They do not have low margins on their products; they cut costs so they can have lower prices and still have high margins.
Remember, let the market dictate what your product’s price should be, then make sure that your costs are in line with that. Be creative, think outside the box, but get those costs low enough to make a profit.
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