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25th March 2020

What's in a Price?

How do you set a price for your electronics products?

When looking to launch a new product into your target market(s), one of the biggest decisions you have to make is the price you set for that product. The wrong price can mean it doesn’t sell well – or it sells really well, but you make no profit. The right price can mean the product flies! So how do you set a price? Let’s look at how you determine the right price for your product and the factors involved in decision.

Basic Calculation

At a very basic level, a price has to generate a profit for you, so should be:

Price = Cost of Production + desired profit

Of course, you need to ensure you are including ALL production costs (past, present and future) and you need to decide what profit is desired. Let’s look at them in an order that should match the product lifecycle.

The Idea Stage

When you have the idea and start to put meat onto the bones, there are three pricing factors to be taken into consideration:

1. Your Competition

Who are your competition and what are their competitive products? A competitor with a dominant market position and a product that has become “the product name” – think Google instead of search engine or Hoover instead of vacuum cleaner – is going to be difficult to compete against. If your product isn’t offering a significantly different proposition, the price point will need to set you apart. Usually that means much cheaper, but may mean much more expensive (think Miele in the white goods market). Can you stand out against this competition?

2. Where the market is going

Is the market changing? Is it about to make a step change – think Ipods compared to Walkmans – that you can take advantage of? If your product is the new product, you have first mover advantage and can command a premium price, assuming you are delivering real value.

3. Market Positioning

Do you want to be considered a premium product that can demand a premium price, a Me Too product with a middle of the road price point that is likely to be considered by the majority of your target audience? Do you wish to grab a large part of the value market, with a low price point?

Look at the differences between Bosch, Siemens and Neff in the kitchen market? All of their products are made in the same factory, with many of the same components. However, their market positioning is significantly different and allows them to command very different prices.

Looking at a premium market position will require an increased marketing budget to help you support your position, so costs will be increased, as one component of the costs within your price point.

The Financing Phase

When setting a price, you need to look at where the initial money is coming from.

4.Targets

What are your sales targets and over what period? What are your profitability targets?  Have you done a cashflow forecast to predict just how much money will go out the door before it starts to come back in?

Is funding coming from organic sources (basically – your money) or from investors? Investors are more likely to have truncated timescales; they will expect to make a profit sooner than you may do with your own money. The sooner you expect to be profitable, the higher the price or the higher the sales volume.

The Development Phase

Research and Development is not cheap. Moving from the Idea Stage to having a product ready for the market involves a lot of work and a lot of different influences on price.

5. R&D Costs

Whilst R&D Tax Credits can offset a significant proportion of these costs, you need to keep a very close eye on these costs. If your product is to be profitable, these costs need to be recouped. Of course, the more units you sell, the less impact the R&D costs have on unit prices.

Unit price contribution = Sum(Total R&D Costs – R&D Tax Credits (if you want to))/Predicted Sales Volumes

6. Raw Material Costs

Once your product has been developed, these costs are probably the easiest to calculate. Each component has a cost and each unit of raw material has a cost. Simply add them all up.

Of course, the target market position will influence the quality of components and the price. Think carefully when choosing materials. Are raw materials becoming increasing rare, so prices are likely to increase? Is production of individual components concentrated in one country or dominated by one company? The 2020 Chinese New Year caused a lot of issues for companies sourcing from China, with coronavirus impacting availability across the region.  If a component company goes bust, can you get alternative components or will this mean a redesign?

The Manufacturing Phase

Before you can sell your product, you’ve got to produce it. How will that impact the price you set?

7. Manufacturing costs

What does it cost to make your product? Can the production line be automated, removing people costs? Are your production runs likely to be relatively small, meaning tooling costs will not be economically viable and hand production is necessary?

8. Shipping Costs

What will it cost to get your components to the factory and the product from the factory to the customer?

Unit manufacturing costs may be lower in certain parts of the world, but shipping them then removes the price advantage. Do you need to consider the carbon footprint of the product? In an increasingly environmentally aware world, you may be better off paying higher production costs, with lower shipping costs and a smaller carbon footprint.

9. Certification Costs

Electronics products need to meet certain standards. CE markings and other EU/Rest of World regulations require regular testing to prove you meet the standards. Ensure you include these in the cost calculations.

The Sales Phase

So you have a product that is ready for market. It does what it says on the tin, meets a real need in the market and so should sell well.

10. Marketing Costs

How much is it going to cost to get the word out and to convince your target audience that they must buy your product? If you are competing with a market leader, your marketing budgets will, almost certainly, have to be higher so you are heard above them and your messaging is sufficiently convincing.

11. Advertising

Although strictly included in the marketing budget, will you need to invest heavily in advertising to get your message out? That well-known money pit for advertising budgets – the SuperBowl – is $5.6 million for a 30 second advert. Will it deliver sales for your product, if indeed you have the budget in the first place??

12. Customer Services

Every electronic product has a level of product failures. Whether during what is described as the Infant Mortality stage (usually caused by poor workmanship or component quality), the Useful Life or the Wear Out phase, these need to be considered.

The warranties and guarantees you are legally required to provide will deal with the Infant Mortality failures. The question that impacts overall profitability (and budgeting) is at what point you stop repairing or replacing products that fail. A quick peruse of social media will show an increasing activity level where products have failed during their Useful Life. Twelve month guarantees are sometimes relied on by manufacturers to reduce claims after that period, but brand reputation, and future sales, can be negatively impacted if you continually refuse to replace/repair failures that are only just outside the guarantee.

The costs of customer communication, repairs and replacements all need to be budgeted for within your pricing strategy.

13. Subscriptions

Does your product need regular updates or would it be beneficial to split prices into an upfront costs followed by a subscription cost?  Think of brands such as Hive or Nest, where the subscription costs continue for the life of the customer engagement. Could costs be covered by the unit cost, with profits coming from the subscription?  The longer someone uses your product, the more money you make.

As you can see, there are a lot of factors to take into consideration when pricing your product; many of which are interlinked.

We hope this has proved to be a useful article, helping you answer the question: how do you set a price. We can certainly help you with certain aspects of the pricing calculation, if not all, so give us a call on 0115 772 2825 and lets have a chat.