Here are some common challenges setting a price for a product or service and strategies that have helped Stanford Embark members overcome them.
“What if my profit formula shows that my business isn't profitable?
Given the amount of work invested up to this point, it can be incredibly discouraging if you do the math and find your business model is out of balance. If you find yourself in this boat, look for opportunities to decrease customer acquisition costs or reduce customer churn by broadening the benefits the customers receive.
“What if my profit formula shows that my business isn't profitable?
Given the amount of work invested up to this point, it can be incredibly discouraging if you do the math and find your business model is out of balance. If you find yourself in this boat, look for opportunities to decrease customer acquisition costs or reduce customer churn by broadening the benefits the customers receive.
"I'm not feeling confident about my customer acquisition cost."
It is often much harder for an entrepreneur to come up with an estimate of customer acquisition cost than it is to come up with an estimate of customer value. The latter stems from the business model. There may be some uncertainty about repeat usage and frequency of usage, but it is basically driven by the contribution margin of the product or service. (Of course, you may not know whether thousands of people will buy your product or only dozens, but the value of each customer is still the same). Customer acquisition cost, on the other hand, depends on the cost of putting an offer in front of a prospect, the likelihood of the prospect responding to the offer, and the probability of converting that prospect to a customer. These are all things that require experimentation to calibrate.
At this stage, make your best estimates and be prepared to test, learn, and adjust your assumptions.
Explore a price setting example
Imagine you have invented a new type of the light bulb based on a light-emitting diode (LED) to replace traditional incandescent light bulbs. The value proposition for your new product points out two principal benefits of the new LED bulb:
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It lasts longer than an incandescent bulb. Your lab tests suggest that the useful lifetime of an LED bulb is 10,000 hours (ten times that of a conventional incandescent bulb).
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It's more energy efficient. An LED bulb can produce the same amount of useful light as a 60 watt (W) incandescent bulb using only 10W of electricity.
How will you price your bulb?
A) Based on what it costs to produce
B) Based on the price of other lightbulbs
C) I'm not sure
Open up your workbook to Activity 6, or download the workbook, and work through the process of setting your price.