The Right Way to Price Your New Consumer Hardware

Written by Sandy Diao

You’ve seen 50% discounted “Early Bird Prices” for crowdfunding and pre-order products that are on the cusp of launch. As you browse consumer electronics on Amazon, you will see a variety of products with similar specifications, but available at a wide spectrum of prices like a $330 ​Walkera QR Drone​ versus a $450 ​DJI Phantom 2 Drone​. So, how does any company decide what their product is worth to a customer?

I work at Indiegogo, a crowdfunding platform where you can launch new hardware products, and my job is to advise entrepreneurs on their launch strategy. Pricing is a key component of that conversation:

Product Price x Units Sold = Total Sales Revenue

The total sales revenue is central to success for a pre-order campaign, because it demonstrates market demand for a product and capital to build a business with. Word on the street is that pricing low is critical to selling as many units as possible; however, low price does not always make sense if it results in inadequate funds for production, or if it doesn’t match the product’s value in the market.

This article takes a practitioner's approach to pricing, starting with a breakdown of different methods of pricing, running through common mistakes, examining an operating cost template, and managing discounts.

Your Price Should Mirror your Product’s Positioning

Pricing is not always about covering costs of production. At the core of your pricing decision should be identifying which set of customers will ultimately be your paying customers.

To do this, you need to figure out how your customers will value the attributes of your product:

Price point $ $$ $$$ $$$$
Pricing type Economic efficiency Market penetration Premium Monopolistic
Example of situation to use I can produce and distribute this product at a much lower price that my competitors, and match or better their quality. I want to get this new product into the hands of as many customers as possible. I might be able to recoup margin through value added services, subscription fees, accessories, repeat purchases, or volume. Customers have trust issues with product quality in this category, and my product promises reliable and transparent practices. We sell more than just a product. My product’s core technology is unreplicable and patented, so we are the only company who can offer this product.
Example product Anker Soundbuds Sport for $60 Crazybaby Air for $99 Apple Airpods for $159 Bragi Dash Wireless Headphones for $299

Common Mistake #1: I want to sell as many units as possible, so I will adopt a “low price strategy” for my product.

This is always going to be a mistake for your bottom line. You will not leave enough margin for yourself to effectively pay for marketing, and there will be costs that you cannot anticipate right way. During your customer servicing, you might have shipped a product late to a customer, and the customer may want a refund because of the delay. Or, after the product reaches customers’ hands, he or she may realize that they don’t want the product anymore. Returns are something you won’t be able to accurately anticipate, and will impose product and logistics costs to you. There are other costs that you may not be able to forecast, such as credit card chargebacks, or a shipping price spike from your service provider.

Common mistake #2: I have a consumer product in a new category, so I can charge a relatively high price point and customers will understand why.

Bringing new technologies to market at high points requires extensive user education through marketing. Take Pepper: one of the first consumer humanoid robots on the market, available for $1,600. While the price point is impressive for its feature set, not everyone is at the point in 2017 where they can imagine how to use Pepper in their daily lives. Unless you are substituting or improving an existing experience that is worth that amount, or customers understand what value the product will bring to them, it is challenging to offer high price tags to mass consumers. It will take a lot of convincing through videos, demonstrations, and third-party validation to get the word out. On the other hand, the same consumer might be willing to pay $1,600 for an amped up MacBook Pro, which is product that they’re ready to use everyday, and can fully understand the benefits of.

Common mistake #3: I will sell my hardware for a really low price, and then make my money by selling the software or monetizing my app.

Think twice about this strategy. Unless the app experience is providing a core feature for the product, it will be hard to monetize the software. In the case of a home security camera, where you charge users for storage the way Nest does, you will not want to charge much of a premium on top of the data storage costs that you’ll incur, since it will make your product unappealing. As corny as it sounds, think of this as selling pizza: you won’t convince a user to pay for features that they don’t want, just as someone won’t come in and add extra toppings if they don’t want to eat it.

Building your Cost Spreadsheet

A common mistake that hardware teams make when looking at costs is not accounting for operational and marketing costs. These calculations should be built into your retail price calculation, as these are the funds you will need to continue to grow your business.

Here's are some of the items you should be aware of that will cost you money. As an example, we’ll imagine that this is the cost spreadsheet for a wireless earbud product that retails for $100:

Wireless earbuds ($100 MSRP)

Type of cost What this includes Expected margin cost Dollar cost
COGS (Cost of Goods Sold) BoM (Electronic, mechanical bill of materials), including the cost of components and assembly costs. Don’t forget to factor in your fixed costs for tooling and production, especially if it’s your first run and you are cash-tight. 20-30% $20
Shipping & logistics Costs associated with warehousing your product, forwarding your freight to warehouses, shipping products from your production port to your destination, and shipping to customers’ doors. 10-20% $10
Channel margin These are the fees you will pay to your channels of distribution, whether it’s third party sales distributors, offline retail stores, or online retail stores. Variable based on product category and channel(Example: typically 10-20% for online retail, and 30%-50% for offline retail.) $20
Marketing margin For example, it might cost you $20 in advertising spend to generate one purchase at a price point of $100. This means you will spend 20% of your price for each unit you sell through paid advertising. 15-25% $20

For this wireless earbud product sold at $100, subtracting all of the costs above, the company can expect to net a gross margin of $30 per pair sold, which equals a 30% gross margin:

30 net margin / $100 retail price = 30% gross margin

Maintaining a 30% gross margin per unit is a great path toward profitability, as there will be other costs incurred as part of the business. This can include hiring new talent, office rent, and more.

How Much and How Often to Discount Your Product

So now that you’ve got an idea of what price to set for your product, how do you know when and how much to discount?

Pricing is a bit of an art. Once you have your costs taken care of, it’s a matter of making sure that your discounts are valuable to the right people, at the right time. Let’s say that you’re selling a connected ski goggle: you’re probably going to anticipate an increase in demand during snow season in December, or when people are planning to ski. Based on that, it might make sense to discount the product to incentivize purchases during the winter season.

Here are some basic principles to consider when deciding when and how much to discount:

What to consider Why this matters Advice
Your customer’s price elasticity Will your customers care if your price is lowered, or does it not impact their purchase decision? There are some product categories where dropping the price doesn’t necessarily incentivize someone to complete the purchase. A good example of this is a refrigerator, a product that you only need to purchase once every few years, so regular discounts don’t make sense.
Frequency of discounting Seasonality is a big factor for many products. Think about which holidays and market penetration opportunities you have to drive up order volume with promotional incentives. Don’t provide huge price cuts regularly. It’s tempting to lower the price every holiday. Instead, consider offering free accessories, and save big discounts for big holiday pushes, like Black Friday, or another relevant season for you.
Tradeoff between margin and volume Lowering your price can bring you bigger boosts in sales volume, but at a trade-off of how much cash you can take home. For any discounting in which you’re going to break even (i.e. not make any money, but not lose money either), be sure that you’re pursuing a worthwhile opportunity.

Once you set a low price, it will be tracked online in articles and on deal sites, which will make it harder to increase the price later on.

Prices Vary for Different Customers

The above materials are great to consider when you’re presenting a price to consumers, but distributor and B2B (business-to-business) pricing is going to be more complex. Where pricing gets challenging is factoring in the intangibles, such as the marketing value that a third-party channel might bring in, or access to a specific group of customers with a specific retailer. You may consider offering a better price to different partners based on the value they can bring to your business.

Pricing isn’t just about making money for your business - it is core to the market positioning of your product. Often, consumer hardware can just be too expensive for mass consumers, or the price point isn’t right for a specific audience. Always talk to your customers and see who is willing to pay, so that you can adjust your product for them. It might mean going back to your manufacturer and working on a cost-down plan so that you can lower the price, in order to sell ten times more units.

Learn more tips like this at HardwareCon 2018, the Bay Area’s Premier Hardware Innovation Conference on April 19th-20th.  Experience two full days of keynotes, panels and workshops focused on the most important topics around building a successful hardware company. Get" class="redactor-linkify-object">">G... your tickets here now if you want to meet the hottest startups, investors and industry leaders across the global hardware ecosystem.

About The Author

Sandy Diao

Sandy Diao

Director of Strategic Programs at Indiegogo

Sandy is a full-stack marketer with experience driving consumer adoption for emerging technologies. Previously, she led global expansion for a Sequoia-funded startup and pioneered a native advertising platform on Pinterest.

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