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The Definitive Guide to Pricing Your New Electronic Hardware Product | Predictable Designs

Value-Based Pricing
Finally, we get to the end buyer. Value-based pricing incorporates buyer psychology into the price. A value-based price is primarily based on the value it provides to the buyer.

The easiest value-based example to consider is a product that saves the buyer money. For example, let’s say your product is an energy saving device which reduces the electric bill for the average household by $300 dollars a year. It’s an easy connection to say the product’s value is at least $300.

In reality, value-based pricing must also incorporate competitor pricing into the pricing equation. Although your energy saving device may save the user $300 per year, competing solutions may be on the market for only $100. The key is to differentiate your product enough from the competition so the value to the buyer will be the dominant factor in their purchase decision.

As discussed in the excellent book The Hardware Startup, finance people typically prefer cost-based pricing, sales people prefer market-based pricing, and marketers prefer value-based pricing. Being an entrepreneur, you likely fill all of these roles so you’ll need to look at pricing from all three viewpoints.

I recommend that you first start by calculating your product’s COGS. From there, you can come up with your cost-based sales price.

Next, perform a market-based pricing analysis to see where it intersects with your cost-based price. Ideally, the market-based sales price falls within 3-4 times your COGS. For comparison you should assume a manufacturing volume of around 10k pieces. That’s a high enough quantity to allow you to achieve much better volume pricing, but it’s still a low enough volume that it’s a realistic early target.

Finally, perform a value-based pricing analysis to see if the value your product provides to users is higher than the product cost or competing products. In the end, your cost-based price is likely to serve as the pricing floor, while the value-based price will be the ceiling price. Based on the competition your sales price will fall somewhere between these two limits.

Although pricing experts will tell you that value-based pricing is the way to go, I typically find that unless your product is truly revolutionary, competition will dictate that market-based and cost-based pricing are more important.

Of the three strategies cost-based and value-based pricing will be the most difficult to accurately estimate. Calculating your value-based pricing is challenging because determining how much “value” is provided to your customers isn’t easy to estimate.

As I explained previously, it takes a considerable amount of work to estimate the COGS for your product, and it requires a significant amount of engineering effort. But it’s time and money well spent.

Ultimately, performing the cost-based, pricing analysis is one of the most important first steps you can take. Any pricing analysis will be of limited use until you know your manufacturing cost. Without knowing your manufacturing cost you have no way of estimating your profit. If you have no idea how much profit you can make then any pricing strategy will be limited.

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The Definitive Guide to Pricing Your New Electronic Hardware Product.

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