The right timing and price

Before a product can succeed, it must clear two crucial hurdles: market readiness and appropriate pricing. This masterclass examines how to determine when your innovation is truly market-ready and how to price it effectively for commercial success.

            

The iceberg model

The image of an iceberg is often used when developing a product. Devising a theoretical concept is the tip of the iceberg. Less than ten percent sits above the water. You will therefore spend most of your time and energy on the other ninety percent while developing a tangible concept.

To start with, you will have to demonstrate your concept works by conducting a "proof of concept". A prototype is a functioning experimental version of a product. You use it to test your idea to find out whether it works and in which circumstances it does not. This generally entails extensive experimentation: a device can start up easily and do whatever you want it to do, but can you prove it will still work when it is in operation for several days at a stretch? How much and how long you have to test it depends on your product. Next to internal test procedures, we also recommend performing external testing. You yourself know your product inside out. External testing lets you find out about the responses of outsiders, for whom the product is not so familiar. Do they encounter operating problems? Do they understand how to use the device?

When the reliability of your product has been demonstrated via prototypes, the real work is only beginning: the development of an industrial product. Finishing touches and refinements are of lesser importance for a prototype, but for the final product they are essential. Isn't it too heavy? Is it sufficiently robust? Does it look good? Are there spare parts available if it malfunctions? Is there a clear manual and documentation available? Does the product come in an attractive box?

When is your product ready for the market?

The right idea in the right place at the right time, that's the ideal scenario. But things do not always happen that way. Sometimes a technology does not take off because there is no market demand (or at least, not yet). Or the technology itself could be premature - take for example solar cells: the first solar cell was developed in 1883! It was made by an American, Charles Fritts. Photovoltaic solar cells have been produced commercially for several decades now but only recently the market boomed. On the one hand this is due to the growing interest in sustainable energy, but on the other the technology has become con­siderably more efficient and cheaper, which increases the chances of success. Government subsidies have also given the industry a major boost.

"Finding the right market was a real challenge at first. We initially targeted offices to tackle the health issues of prolonged sitting, but enthusiasm was lacking. The energy generated from cycling was unnecessary with all the power outlets. In contrast, when we brought the same product to airports, it was an instant hit! It’s fascinating how much psychology plays a role: at the airport, people spontaneously started cycling and working on our tech-infused furniture. The location made all the difference." Patricia Ceysens, founder and CEO of WeWatt

Vice versa is the type of technology, which can be made practically attainable, but without any market demand. In recent years, sensors with ever more megapixels have been developed for digital photo cameras. From five to six megapixels onwards they could compete with the analogue cameras. This is what the market was waiting for and sales grew fast. This growth lately has ground to a halt even though compact devices now come with a ten-megapixel resolution. After all the added value is limited. The changeover from a two megapixel to a five-megapixel camera helped take better photos and better prints on an album format. The demand for even larger prints (you cannot print ten megapixel photographs on A3 paper with satisfactory resolution) hardly existed on the market and the result was stagnation of sales.

When is a product ready for the market? This depends on the product itself. Consumers expect their car to start and run flawlessly every day. With a software suite, customers are happy to expect a service pack with patches and bug fixes to follow only a few months after purchase.

Start by analysing whether the target market is sufficiently large. You could have a wonderful product, but if it can only be used in a very limited niche, it is unlikely to be attractive to companies or investors.

The right prize

Throughout the entire process you have to take into account the pricing of your product or service. In order to know if you are working with a viable product, you must have an idea of the ultimate selling price from the very beginning. Since a considerable period of time passes between the concept and product, and since the market can change drastically during that period, this is not at all an easy task. Raw material prices may increase; competitors can come up with alternatives. Some trends are quite predictable, others are not. Despite the significant uncertainties in a price calculation, you need to do this regularly.

"We believed we could sell it for €20-25, thinking the convenience was worth that much. But then an investor told us, 'No way, I wouldn’t pay even a euro for it.' They appreciated what we created but thought it was crazy to expect such a price. Now, looking at the market, it's clear we're talking about a price range of €2 to €5. We had to radically redesign our product because we realised what we built was far too expensive and complex." Vanessa Vankerckhoven, co-founder and CEO of Idevax

The cost-plus model

In the first phase you need to start by calculating the internal cost. Map all the cost items in detail: how much time, energy and money did you spend on the research and development? What is the price of raw materials? How much will the production, inspection, distribution and marketing cost? What is the margin of the reseller or the sales channel? What are your variable and fixed costs? If you have an answer to all these questions, and you add your profit margin (for example 30 percent), this total amounts to the selling price, according to the cost-plus principle. The price you obtain that way is not necessarily the ideal sales price.

What does the market want to pay?

The price your competitors charge for similar products is a good indicator of a feasible price. Then you have one of two options. Either you target the price-conscious consumer who is looking for a bargain or you undersell.

Which is not to say that a cheaper product will necessarily sell better. The consumer's psychology plays an important role: he is often willing to pay more because it makes him feel that he is buying a better product. Customers often follow the classical proverb "buying cheap is expensive" and therefore are willing to pay for quality, reliability, durability and service.

If the only negative comment your customers have is the fact that your product is too expensive, you will probably be able to maintain the price.

You can determine your selling price by striking a balance between the cost­plus model on the one hand and the price the costumer is willing to pay on the other. Simply take the average values of both, or even better, attach more importance to the latter.

The result is the following formula to determine the sales price:

●        Take the cost-plus price.

●        Add three times the price that the customer is willing to pay.

●        Divide that sum by four.

---

Enjoyed this post? We’d love to hear your thoughts! Drop a comment below to share your insights or join the conversation.