Pricing strategy · Hardware

How do I figure out what to charge for my hardware product?

Pete Petrin Software Engineer at Onevest

March 5th, 2015

For fellow hardware entrepreneurs, how do you determine your pricing? I 100% understand margin, so I more mean how do you determine willingness to pay? I see a lot of hardware startups don’t charge enough, and it hard to raise after it’s set. That said, if you later drop your price sometimes it’s seen as desperate. Unlike software, you can’t easily A/B test your pricing and change it for different customers. Would love to hear strategies/models.

Philip Petracca Co-Founder, CEO at Fizzics Group

March 5th, 2015

Testing pricing elasticity was always more of an art, or required budget for extensive focus group study.  Lots of platforms available today to take advantage of, crowd sourcing being one of them - great way to test willingness to pay, direct feedback on marketing messaging and best of all, revenue generation. 

Avrum Mayman Innovator, Entrepreneur, Product Visionary

March 6th, 2015

To build on some of the comments here.

I look at the 3 C's - Cost, Competition, and Customer.

Cost - Is probably the easiest to start with and should set your MINIMUM pricing.  As has been stated earlier, you will need to incorporate all potential costs to remain an ongoing concern.  You might have a strategy of breaking even on the first generation and counting on future cost reductions to generate profit, but this is a risky strategy, especially if you don't have strong IP, that could fail if lower cost "me-too" products enter the market.  A different strategy is to price the hardware low if you can find a recurring service/software revenue stream that will generate profits.

Competition - How competitive is this market?  The more highly differentiated your product is the more you can charge.  You will need to consider substitute products as well if you have IP that can keep lower cost imitators at bay.

Customer - There are two ways to approach this:  Price elasticity and value creation.  In my experience, beware of conducting surveys on price, because the price people say they are hypothetically willing to pay has been about 1/4 to 1/2 what they actually do pay.  IF you can clearly describe the value created, then IMO that is a much better way to set price because customers easily understand that.

Karl Schulmeisters Founder ExStreamVR

March 6th, 2015

Why can't you do "A/B" Testing? Label it differently, go to a couple of different events that are disparate and price it differently... add some "incremental features" over the base price and see what that gets you.

The other way to do this is to do "value based" pricing - IE what actual value do you add? So lets say you have a device that is 10% more effective than your competitors you can set your price 5% higher than your competition and position yourself as still giving thema 5% benefit
you position it 10% less than your competition and you give your customer a 20% benefit.

and if you aren't creating value - then are probably wasting your time.

Where it gets really hard is if you are disruptive and don't have lot of competition.and the hardest I'd say is the product that like the NEST primarily gets its value from Social Cachet rather than actual functionality

but as Phiilp said - its a bit of an art

note also that 100% margin also needs to include ALL of the future intangibles of COGS - marketing, sales, discounts, re-engineering, lawsuits IP defense etc.

Judit Fabian Seasoned Finance Professional

March 5th, 2015

Hi Pete, I am going through the same dilemma. I have done a consumer study, so I simply asked people. Not only was it helpful in understanding what I can charge, but it zoomed in more clearly on who is willing to pay what price on the basis of what value they see in my product. That said, prior to the consumer study I have also read a number of reports on the shopping habits and preferences of my target market, so I already had some idea for a range. Of course, margins need to be kept in perspective.