Market Based Pricing For Your CNC Projects
Creating a business has many challenges, chief among them is deciding how to price your products. One method is time and materials base pricing, which is a careful way to set prices that ensure you can recover your cost of the CNC project materials and be compensated for the time taken to create the products.
A second method is approaching pricing from the market side. Market-based pricing, as the name suggests, is developing the price based on the value of the product from the point of view of the consumer and competition.
Why Market-based pricing?
There are two primary reasons for market-based pricing. First, maximizing your margin. As mentioned previously, time-and-materials-based pricing is safe. It lets you recapture the cost and be compensated for your time. But what if buyers are willing to pay 1.5x or 3x more? Using market-based pricing lets you maximize your profit based on the value consumers place on your product.
Second, the perspective of market-based pricing is more helpful for decision-making. By keeping a close eye on the market value you can respond more quickly to fluctuations and determine if you need to change your product mix or pricing. By also understanding your cost basis you can see where pricing trends intersect with your costs and when you want to make changes. Absent this perspective, your pricing strategy will run behind market changes.
How to implement Market-based Pricing
Understanding where your product fits into the market is the first step. A great source for market knowledge when it comes to crafts, woodworking, and CNC projects is etsy.com, and a popular category is signs, so we’ll start here.
When you’re viewing the category, the range of materials, customization, and creativity stand out. This is true with most categories.
Where does your product fit in this spectrum?
While looking at the group of products that align most closely with yours, you may still see a range of pricing. Take a look at other aspects beyond the products themselves. Is there free shipping? Are there more (positive) product reviews? Does a company have a story?
Dive into some of the companies to get a sense of how they operate. Remember that this is market-based pricing. Consumers are buying both the product and the company. Some companies will churn out high-volume, low price products. While they are low on the individual margin, they make up for it in higher volume. Other companies are priced higher and tend to have a more personal approach to their customers. While the products may be similar, the consumers are different and have different expectations of their experiences.
Where do you want to operate as a company?
If you want to go low price/high volume, be ready to turn over products quickly. If you want to go with a higher price/more personal approach, be ready to spend time hand-holding customers. Whichever way you go, apply the pricing strategy across your product lines. Your pricing strategy is part of the consumer experience and should be consistent no matter what they buy from you.
What you might also notice is that the pricing does not always correspond to the cost to create. While market-based pricing is intentionally divorced from the cost to produce(within reason), the market demand or popularity of a category vs supply will impact the price that can be charged. You may find that products that cost less to produce actually have a higher market value. And the reverse is also true.
Market-based pricing requires constant monitoring and managing. Unlike time and materials-based pricing where costs are relatively consistent, market-based can increase or decrease quickly. Too many competitors come into the market and the market price drops. An influx of consumers and the prices can soar. Supply & demand dictate your price. You have to spend time managing this.
Final thoughts on pricing
When working out your pricing strategy, you may want to calculate prices based on time and materials as well as market-based. Doing so will let you know the lowest “fair” price for your efforts. Is the market price equal to or higher than this? With both calculations, you can make smarter products and pricing decisions.
Market-based pricing is dynamic. Keep an eye on the pricing landscape as well as your sales volume. Sales volume changes can mean that the demand is changing, or your competitors are changing their prices. One of the good things about market-based pricing is that your ability to flex with the market is built into your pricing strategy. When done correctly, your decisions flow in time with the market.
Pricing strategy is important, but only a part of the customer experience. As you develop your business and explore the different capabilities of your CNC machine, look for elements that set you apart. It may be that your CNC projects have a theme that becomes recognizable, or it may be the way you interact with customers, or it may be the way you communicate on social media. Give customers a reason to remember you and to keep coming back. The more unique and appealing you are, the more margin you will be able to work into your pricing.