Does one need to charge a lot to stay profitable?
How does B2B tech business make money and profit? do you reduce your price to increase volume? or do you charge more?
I don't know a lot about running a business yet, but I think the goal is to maximize profits and minimize costs. It would seem that most people try to accomplish this by trying to squeeze every last penny out of the customers, and for some it seems to work. Elon Musk chose to do something different (bring down the costs of his products) and still succeeded. Which is the best pricing model: 1) Charge people a lot for your product, consequently making more money per unit sold or 2) Make the product cheaper and therefore making it affordable to most people or is there a magical point where those two meet?
Various voices are heard. Some representative opinions are included here.
One person commented:
Definitely depends on the product, I have one business that I was selling for the average price making good profit per sale but then one day I dropped all my prices to beat everyone else and it tripled my monthly income. While I didn’t make as much per sale I sold 3X as many so in the long run it was way more income.
A second person commented
Without more details about the product and business model, it remains a rhetorical question. There is no unique success formula for all businesses.
For me, the most appealing business model is to sell for a small price to a huge number of customers (or better subscribers with recurrent fees). I believe it is more safe and sustainable way of growth, but it also requires a critical mass of customers to become profitable.
I've seen many other models when there is a technological product, bringing unique value to big customers (mostly in the b2b sector), and in that case, the founders are free to set up the price frames which they want. If they manage to deliver their value to customers and agree for the deal, they can make x100 or even more on each product sold and succeed in the best way.
Bu the option you described as "squeezing every last penny out of the customers" has nothing to do with the business model, it sounds like one of the typical mistakes in pricing when founders don't focus assessing value and other parameters for an objective pricing generation model, but just try to trick money out of the customers through different sales techniques. It is not a sustainable business model: customers, who overpaid for the product or service will never come back and refer other clients.
Someone chimed in.
You pretty much mentioned everything I was going to say lol.
Perceived value is very important if you plan on selling to SMB's or individuals on a budget. If they don't feel like they're getting their moneys' worth then chances are they won't be repeat customers or keep your service for very long.
I also like the "lower price, added value" subscription model where I can charge a comfortable price and make sure that I also know the customer is getting value.
I also don't automatically start upping the price when I add even more value or features to a service. Usually when I announce (customer-wide) that we've added new features but the price will remain the same, I get huge positive feedback. This is also a big play on getting their word-of-mouth referrals.
A third person commented:
Price elasticity is what you need to look into. Have fun.
A fourth person commented:
For someone to change to your product, it either needs to be cheaper or better. If it's better, it can be more expensive. If you're first to market, best to charge what you can. People value a product based on the time it saves or the pleasure it provides, not so much on the cost to produce.
A fifth person commented:
You can charge what it costs to make (or less) and sell a lot. But you lose money. You can charge a million dollars for a t-shirt (and get free press), but no sales. Somewhere inbetween is optimal pricing, but companies often have to experiment to find out what works the best.
There was also a discussion about why Elon Musk claimed to be lowering costs of cars and space travels. It goes like this:
Elon Musk chose to do something different (bring down the costs of his products)
Huh? Tesla cars are expensive luxury products, with current margins around 20%. And Elon said he's targeting 25% margins next year.
I was referring to Musk's determination to bring costs and prices down. Think about how he plans to make a ticket to Mars worth $500,000 , when he had the option of making it as expensive as he would've liked.
when he had the option of making it as expensive as he would've liked.
Except he doesn't. There are two sides to a purchase. A seller, who picks a price to sell something at, and a buyer, who decides if the price is worth it.
Elon wants to drive the price down, while keeping a solid profit margin, in order to attract more customers, therefore making more money.
$35,000 is an expensive luxury product when talking about cars? i dont think so. It was a huge deal when they were able to bring a car with that tech to market with that price range. That is what he is referring to
It was closer to $50k when they initially launched it. They only made a stripped down $35k version which was oddly difficult to buy compared to the rest for a brief period of time. Probably because it was a unprofitable loss leader intended to say they did it.