What is a product?
Well, I don’t hope this comes as a surprise: Your product is, of course, the things, services, or solutions you sell to your customers - and hopefully the answer to your problem statement. However, a product is not just the thing you’re selling, but just as much the solution or experience surrounding it. Let’s say you're selling a car. That’s a product. A car with a warranty is also a product. A car with a warranty and a smooth design is a product too. Do you get the point? The product you’re selling is not just about the product itself but also its value creators.
If you’re selling tickets to a play, the ticket isn't the product - the experience is. What’s the product if you're opening up a restaurant? Food? An experience? Both. If you’re a consultant, your product could be time or even results. Products are many things, and what’s essential for your startup is that you're able to define yours - with everything it contains and offers your customers.
Define your product
Defining your product might seem funny to you, because hey! You're the expert! But it's a good exercise since your startup is going to revolve around your product. You'll have to present it to your customers, your future employees, and stakeholders over and over again.
When defining your product, you must be concise about every element that creates value for your customers. To make it easy, let's pretend you're making a product presentation on your website, like the ones you know from Apple. Start by explaining how it solves your customer's problem. To do so, you can use your Unique Value Proposition as an inspiration; but feel free to go deeper. Then explain the features of your product. On Apple's site, you will find a long list of features that differentiate the new iPhone from the old ones – and their competitors' smartphones. If your product is a restaurant, you'll describe the food, the ambiance, the outstanding service experience, the central location - or even the vendor of coffee beans, or the designer behind the furniture. The point is that every aspiring entrepreneur has to be able to describe and define the entire package of their product, to give their customers a reason to buy it.
While customers are more interested in the product and the value the product brings to their lives, your investors need to know what's under the hood. So here's where you get to put all of your technical expertise to use. How is the product made? What's the current status of the product? Is it in a design phase, do you have a prototype, or is it a fully viable product? And just as important, what's the roadmap for development?
Your potential investors are probably skilled businessmen (or women). They need to know everything from above, plus all there is to know about distribution, pricing, and how you expect to position the product in the market. I know what you're thinking; those investors sure are high maintenance! Agreed, but nevertheless, clarifying those concepts is an essential part of succeeding with your startup.
How to distribute your products
Distribution is about every step your product goes through while traveling from you to the consumer. One thing is to make a product, but hopefully, you've got a plan for selling it! While some products are sold directly to customers from your website, others might have a more complicated way to go. Perhaps you've made organic applesauce that is to be sold through retailers. That means you're selling business-to-business, and it might contribute to a whole line of new difficulties as retailers have different concerns than consumers. Perhaps you will have to meet their expectations of your product's shelf life, terms of delivery, or even ingredients. Another possibility is to sell to wholesalers, who then sell it to retailers. That's adding another step to your distribution. It's not either better or worse to have a complicated chain of distribution. Every category comes with options in return. Here are a few things that you should make sure to plan before launching your product:
Channels: As explained above, there are many places to sell your product, and they each come with their complications. Many products have more than one channel - it's not irregular for startups to sell both directly to consumers and through intermediaries. If your startup plans to sell through several channels, you should make a plan for each channel. Make a plan for how your customers place their orders and how they pay. Each channel will need its terms of conditions and maybe even different pricing. Marketing, customer service, and customer value will probably need different strategies. It can be a challenge to ensure the best possible customer service when you're selling through a retailer, and another business will be handling your customers for you. And how do you create customer loyalty towards your product if you're not in control of the distribution after you drop it off at the retailer? Big questions and time to get creative!
Packaging: Not all, but many products need packaging. If you're selling software, you're off the hook now. However, if you're distributing your product physically, it can be an extensive - and expensive - task to ensure that the product arrives in one piece. You might need packaging material such as boxes, cardboard, foam rubber, paper bags, freight-label machines, and a silly yet lifesaving tool such as tape.
Freight: Last but not least, you better have a plan for the transportation of your product. If your startup is selling software your customers need to download, you need to set up a secure way to do it. If you are transporting your product physically, you need freight vendors capable of doing the job. Do you transport by mail, bike, truck, ship, or flight - maybe all three if you're selling globally. And the financial part of it as well; who are paying the freight, you or your customers? Return Policy is another word not to pass by. Make a term for if and how customers can return the product and who is paying for it.
How to price a product
Pricing a product or service is a challenge for many entrepreneurs and can significantly impact their startup's success. In fact, one of the reasons why startups often fail is that they price their products wrong. It could be that they have priced their product or service too expensive to attract customers or set it too low that they won't be able to bring the revenue needed to grow their business.
A more thoughtful approach to pricing can go a long way for a startup's profits and customer satisfaction. Setting time off to think and research pricing can also help you explore different pricing models and product variations you wouldn't have considered before.
Defining a startup's pricing involves setting a structure with an actual price and model that customers are willing to use and pay for its products or services. A startup's pricing is based on factors such as customer, competitors, product, and strategy. The traditional way of looking at pricing would be to consider your supply and demand. In theory, your startup has a limited amount of product/goods, and there is a certain level of demand for it in the specific market. Because your demand in most cases naturally increases as your price goes down, you could, in theory, adjust your price, and you would have maximized your potential profits. In reality, for startups, this does not hold up. Not all new businesses and especially tech startups have a limited supply of products. It is possible to develop a web- or mobile app, and over time the cost to produce additional units would approach zero. Besides, many startups have entirely new products and innovations for which no competitors exist to benchmark against.
As a result, when pricing a startup's product, the traditional way of doing pricing does not work well. When pricing your product, it's important to take input from your customers, employees and look at what the competition is doing. If no competitors exist, you could look at the products most similar to yours. And lastly, when you have a better understanding and some feedback, you should, as an entrepreneur, always be able to trust your intuition and sometimes go with what your gut tells you. Pricing shouldn't be rocket science or a simple math problem, it's a judgment call you need to make, and pricing is, in the end, a flexible thing that can be changed.
Do you wish to set a low price and aim to penetrate the market, like the clothing brand Zara, or do you want to set a high price to be perceived as a premium product, like Chanel? Whichever pricing model you choose, the most important thing is to be crystal clear about them. You should not underestimate the value of a good pricing strategy. Be creative, and put yourself in your customer's shoes and keep it simple. Customers are not fans of complexity in pricing.
We have compiled a list of the most commonly used pricing strategies by startups that you can consider:
If you're aiming for a big bite of the market, and you're able to keep your cost low, it might be a good idea to market your product with a low pricing strategy. Setting your prices lower than your competitors, will without a doubt, make sure that you'll get customers, and it is a good approach for startups in very competitive markets. However, you don't have to be Einstein to know that you better have low costs if you have low prices. For most startups, that's simply not the reality, which is why Market Penetration rarely is a possibility.
Premium pricing strategy is the opposite of Market Penetration. When you price your product to be a premium product, you'll always get a smaller market share - simply because fewer people will afford your product. However, you'll be aiming for a segment that wants premium products and isn't price sensitive.
In this more traditional product pricing model, the price is set at two to five times the product cost. If your product is a commodity, the margin may be as thin as ten percent. Use it when your new technology gives you a tremendous cost improvement. Skip it where there are many competitors.
If you can quantify a large value or cost savings to the customer, charge a price commensurate with the value delivered. This doesn’t work well with “nice to have” offerings but does work for new drugs that solve critical health problems. An excellent example of this pricing strategy is that of the channel tunnel between England and France. Instead of comparing prices to other tunnels or air travel, they calculated the tunnel’s value for the people using it. The tunnel meant that families could bring their cars instead of renting a car when they arrived. This meant the tunnel’s value was comparable to flight tickets + car rental. Not just the flight tickets alone. With that calculation, they could prize the tunnel usage much higher than ordinary tunnels, but well aware that it would still be the value solution for customers. Very clever!
In heavily competitive environments, the price has to be competitive, no matter its cost or volume. This model is often a euphemism for pricing low in certain areas to drive competitors out and high where competition is low.