Product Pricing Strategies

One of the most challenging tasks that an inventor will face is determining an appropriate selling price. This page is not intended to be an all inclusive resource for every concept with regard to pricing strategy. However, it will get you in the ballpark of where you need to be in terms of retail and distribution margin.

Let’s assume that you have done a fair amount of market research for your new product. So you know who the major players are and what comparable products sell for in your target market. This should be wrapped up nicely in a thorough business plan the includes market strategy and ROI. Also, at this point you should have a good elevator pitch as you consider alternatives to fund your idea - grants, crowd funding, family/friends, angel investor, venture capital, or simply self-funding.

The next step would be to look closely at the cost involved in “making” your product. Focus on things like materials, labor, “all” overhead (electricity, etc.), and retail product packaging (not shipping materials). Be sure to account for everything as this is the primary figure for which all other important calculations will be based. Now that you have an accurate figure for “cost” it’s time to move onto determining a proper selling price.

The manufacturer suggested retail price (MSRP) should encompass enough margin to cover both the retail and distribution channel as well as any investment needed to produce the product. You need to determine whether or not your sales will be Business-to-Business (B2B), Business-to-Consumer (B2C), or a combination of both. If your ultimate goal is retail, the manufactured cost should represent 20-25% of your MSRP. This will provide enough room to scale your margin from distribution to the retail floor. Consider the following example to illustrate this strategy:

$2 = Your cost to produce the widget. You sell the widget to a distributor for $3.50 or a 43% margin. As the manufacturer be sure to price the product high enough to achieve your desired ROI.

$3.50 = Distributor price to buy from you. They sell it for $5 to the retail store at a 30% margin.

$5 = Wholesale price purchased from the distributor by the retail store. They sell it for $10 to the consumer at a 50% margin.

So the pricing steps look like this:

$2 - Manufacturer

$3.50 - Distributor

$5 - Retailer

$10 - Consumer

Use the calculator below to play around with different pricing strategies:

In some cases you can afford to be more aggressive and take less margin. This is especially true in niche markets with less competition, or B2C strategies with no intention of utilizing a distribution channel. Remember that you can always come down in price. Also, you can incorporate discounts and product sales below the target selling price. However, setting the correct price at the onset is imperative for a successful launch. The wrong price can kill a product quicker than anything.

Hopefully you’re not in a position where an appropriate margin brings your selling price above market comparable items. If so, you need to determine whether or not your product is significantly better. It’s very hard to sell against products that are less expensive and get the job done. To increase the odds of market success it’s always a good idea to be cheaper and better.