Pricing: Early Stage New Product

Last week an entrepreneur discussed pricing a new product to be sold initially on the Internet. We talked about product costs and his guess what he thought the retail price should be. My comment after listening was his estimate or retail was far below numbers that would support a 45% Gross Margin.

He was surprised by the answer, so decided to share my thoughts here. Take landed component costs and multiply by 6. This gives realistic expected retail during earliest stage development sessions.

Fifty percent 50% is the retailer margin, the balance manufacturer costs, overhead and available for spending and profit. Specifically, product cost is 33% of revenue, SG&A 67%. Further ball park figures I use are sales costs 12% net revenue, G&A 40% and Available for Profit 15%. Clearly the multiple can be changed to reflect competitive realities or a higher internal rate of return on cash that is in the detailed example.

The second recommendation is to price anticipating retail distribution down the road. Various Internet promotions such as free shipping and other option features could be bundled into the initial offering prices to lower the effective price during the test launch period. It is far easier to reduce prices once in the market than increase them.


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