This Is What You Need To Know Before You Can Price Your Product

Seven steps to get to a proper pricing equation

Gate 1: COGS

Before you can even think about how much you can sell your product for, whether that product is software, hardware, or sandwiches, you’ll need to know everything there is to know about the direct costs to produce the product itself. This is known as Costs of Goods Sold (COGS).

  1. As far as pricing is concerned, COGS should not change drastically as you scale. In other words, whether you’re selling one product or a thousand products, you want the COGS per item you use to set pricing to remain relatively unchanged.

Gate 2: Indirect costs

Indirect costs are where you can start introducing scale in terms of its impact on margins.

Gate 3: Model Impact

A common mistake I see in pricing these days is when the company lets the pricing model dictate the actual price of the product before the costs are considered. It’s almost as if pricing models like subscription pricing are chosen to build in cushions of margin to reduce the risk of getting the price wrong.

Gate 4: CAC and LTV

The first three gates don’t have a lot of guesswork involved, but the rest of them definitely do, starting with the Cost to Acquire a Customer (CAC) and the customer’s Lifetime Value (LTV). And as alternative pricing models like tier and subscription become more mainstream, accurate numbers for CAC and LTV become more critical.

Gate 5: Markets and margins

Some maybe-obvious-but-surprisingly-overlooked math. You need to know your market size. Larger markets can withstand lower margins. Smaller markets demand higher margins.

Gate 6: Check your competition

This step is also usually done too early, and is also mistakenly used as a substitute for the other gates. Once you know what you can sell for, you can then determine what you should sell for.

Gate 7: Value

This the hardest gate to get through, but once you do, all the numbers will fall into place. This will also be the moment you’ll know whether your pricing is right or wrong.

I’m a multi-exit, multi-failure entrepreneur. Sold ExitEvent. Building TeachingStartup.com & GetSpiffy. Former Automated Insights. More info at joeprocopio.com

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