Some might be puzzled I’m asking that question. Isn’t it obvious?
Not necessarily.
Here are 5 different goals you might want to achieve:
2.1 Maximize revenue
One of the most common reasons for setting the right price for your product is maximizing revenue. However, this is not always a valid reason.
Depending on your situation, stage of a business, and goals, you might want to maximize one of those two metrics:
Net income = Total revenue – Total expenses
Net income might be a valid goal for stable businesses that must deliver consistent profit for shareholders. Another type is businesses with significant cash flow needs.
Return on investment (ROI) = Net income / Total expenses x 100
ROI is particularly important during significant growth phases. Another use case is companies with many products that want to allocate their resources better.
2.2 Penetrate the market
Another possible goal is to maximize the market share to:
- Penetrate a new market as fast as possible before your competitors do it.
- Acquire customers from your competitors.
An example might be free access to ChatGTP 4 only for customers using Microsoft Bing and Microsoft Edge.
2.3. Improve your cashflow
You might want to set a low price, sometimes even lower than your costs, to improve your cash flow.
If your payments to partners and suppliers can be delayed, you can reinvest that money. This might be cheaper than taking credit, especially if you are a startup and your options are limited.
Another way to improve your cash flow is to charge customers in advance, for example, by promoting annual subscriptions.
2.4 Get a stable revenue
Stable revenue allows companies to predict their future condition with greater accuracy and, ultimately, make better decisions. It also helps the company meet its ongoing financial obligations, such as payroll or loans and makes it more resilient to economic crises.
2.5 Build trust and establish relationships
Many companies offer a cheaper or even a free product to build trust and establish relationships with the customer. In the future, they can offer upgrades or additional products that customers are more likely to consider.