Have you ever heard the phrase “The market decides the value of a product or service.” or something similarly stupid? You are not alone. The market can’t possibly decide for you what you should sell your product or service for. At most, the market can help you decide, or give you input on what they think of the value of your product or service. But if you let the market determine the value of your product or service for you, you are in serious trouble.

The reason why you can’t let the market decide for you is quite frankly because the market has no idea of the costs associated with manufacturing a product, or providing a service. If you ask someone what he would want to pay for something, he is going to give you his perception of the value of that item in the best case. And his perception will often not match with reality, unless he has certain knowledge about the item and the costs that go into making that item. In the worst case, he’ll not want to pay anything for the item, or something far too low.

So what you’re going to have to do when you want to offer a product is that you’re going to have to determine for yourself exactly what it costs you to make that product, what it will cost you to support that product and guarantee continuity if this is applicable, what the minimum amount is that you realistically expect to sell and the profit you would like to make based on where you want to take the product and your business in the future. The last thing is assuming you want growth and improvement in your current situation, because if you calculate the price of your product using the costs you have today, you’ll only be able to, perhaps barely, maintain your current situation. If you know where you want to be in the future, you are going to have to work with the costs you expect to have then, and calculate the price of your product accordingly. This will ensure that when you sell the product today, you will be making enough profit to grow to the situation you planned for the future.

The key thing is that you have to be very honest to yourself and to your potential customers about things. You should calculate the costs of making your product honestly, and not overestimate things. You should also not want to make absurdly large profits on your product, driving the price up unnecessarily. When you tell your potential customers what your product costs, you should be able to tell them with an honest face, and be able to look them in the eyes, be confident and explain exactly why your product costs what it costs. When they value your product or service too low, you’re going to have to work on educating them about your product, what goes into making that product or offering that service, and you’re going to have to communicate the value of your product or service to them.

When you’ve done all of that, and you find that there’s still nobody who would want to pay for your product, or that there are too few people who can pay for it, then you have to be honest enough to yourself to admit that there is no market for your product or service. And in that case, you can work on scaling back features of your product so it can become cheaper, or simply freeze the product or service until there is enough demand for it and do something else in the mean time.

If your product costs $200, and the customers insist on wanting to pay $100 for it, then you should have enough courage to walk away. You should have enough self respect to know the value of your product or service. You are the only one who can honestly know that. If you don’t know it yourself, nobody is going to know it for you. It is your job to honestly and realistically value your product and to communicate that to others. Others won’t do it for you. Others will want the best possible deal, and they won’t care if they screw you over in the process (they probably won?t realize this in the first place). If they can get it for free, they will take it. It is your own responsibility to know your value and that of your products and services.

For example, if my hourly rate for programming is $50, and someone thinks that is way too high and wants to pay no more than $10, I’m going to tell him that I could mow his lawn for $10 an hour, but I’m not going to do any programming work for him at $10 an hour. Once again, you have to know the value of the product or service you offer, you have to be very honest about it and make sure you get what is reasonable to you. In this case, if I would find that there isn’t a single person who would want to hire me for programming, I would in the worst case indeed choose to mow lawns at $10 an hour. If you give in to what others want to pay you, when you know that is far too low to cover your costs or that they simply value your product or service far too low, you’re responsible for your own failure and for others taking advantage of you. And the same applies to any business.

If you offer your product or service at too low a price, you may find that suddenly there are more people interested and you get loaded with work, but somehow you still don?t make enough money to cover all your expenses, let alone make a profit. In this case you are fooling yourself. You can boast about having a lot of work, many customers, but what does it bring you in the end when you work your ass off every day and can?t even make a profit? If you offer any product or service at an absurdly low cost, or even free, everyone will want it. This is stupid artificial market creation. You shouldn?t want everyone to want your product, you should want paying customers to want your product.

Keep in mind that when you go to a store somewhere to buy something, the price has already been decided for you as well. Nobody is going to want to know what you think the value of a plasma screen should be. They?ve already determined the price for you. You?re just going to have to accept that and decide whether you can afford it or not. You can?t go in and say “well you know, I?m part of the market and I say this plasma screen should cost $500 instead of $5000.” If they don?t immediately kick you out of the store, at least they?ll thank you for your time and walk away or laugh at you hysterically.
The same thing goes for everything you?ll need to be able to make your own product. Things cost money, and when you?ve developed your product, you should ask for it what is reasonable to you. Anything less should not be an option. It?s simply business. If someone wants your product, they should pay for it, otherwise you should not be interested in them as a customer. The only interesting customer is a paying customer.

There are ofcourse exceptions which can be based on what your goal is with a certain product or service. For example, are you simply interested in selling your product or service for what it?s worth and making a profit, or are you interested in gaining marketshare? When you?re as big as Microsoft for example, you can play with these options. Microsoft can afford to sell their Xbox console at a loss just to expand their marketshare on gaming consoles. Their priorities don?t currently lie in making a profit or covering costs, but just to gain marketshare. Once they have the marketshare, they have other interesting possibilities which are more important to them. But Microsoft is in the position to do this kind of thing, they have enough cash lying around from their sales of Windows and Office products, where they make exorbitant amount of profits. Smaller companies don?t have this luxury. In their case, their products have to cover costs and they have to make a profit to be able to look at future growth and possibilities.

But wait, what if there are others in the market who can offer the seemingly same product or service at a much lower price? Damn, then you?re in trouble, right? Wrong.
When you want to be a player in an existing market, you?re going to have to know your competitors, and you?re going to have to know them well. You?re going to have to know their products, the pros and cons of their products, the level of quality of their products, the features of their products, the quality of their support, their pricing etc.
Based on that information, you?re once again going to have to look at your own products and you?re going to have to be very honest to yourself and determine where your products stand compared to your competitor?s products. If you determine that you offer better products with regards to features, quality, support or anything else, you can value your products accordingly and should not be worried if the price of your product ends up being higher than your competitor?s product. You?re going to have to communicate this extra value in your products to your (potential) customers. You shouldn?t even worry when your customers actually go and buy your competitor?s product. If you are really better, sooner or later they will be coming to you when they discover the issues with your competitor?s products. And I speak from experience. I have seen this happening many times over and over again. And when these customers with their bad experiences come to you, and you actually offer something much better, you?ve locked them in for a long time to come. The key thing is once again to know your value, to be honest about the value you offer and be very confident about your products and your capabilities. If you don?t do it yourself, nobody is going to do it for you. If you don?t know your value, do you expect others to know it for you? If you value yourself too low, do you think others will give you a higher value? If you are not confident about your products, do you think others will be?

You may occasionally also find that there are competitors who offer the exact same product or service, but still at a much lower price compared to you. And you?ll be going crazy trying to find out how they can possibly be that much lower. You?re going to look at your development costs, try to see where you spend too much money, where you can cut costs, but you?ll find that you?re actually running very efficient. The price you determined is right. So how can your competitor be that much lower?? Fear not, unless it is due to a big secret advantage they have, they are probably just being that low to attract more customers for a while. They won?t be able to keep it up for long. Otherwise they?ll seize to exist, and you?ll still be around for your customers. I?ve seen this a few times with startups who think they can win marketshare quickly by being much lower in price and get projects at big customers to build up their portfolio and credibility. They don?t last very long, or they soon have to adjust to the hard reality. You shouldn?t worry about these types of competitors.
You should worry when it?s a company like Microsoft being much lower in price, but offering the same quality. Those kinds of companies have lots of cash and will stay lower until they beat you out of the market because you just can?t sell your products anymore.

The tactic you can use to fight against those kinds of competitors is to be smarter in terms of developing your products, introducing new features or capabilities unique to your product so that you can have a marketing advantage compared to them, and can be a few steps ahead. An example of this was the fight between Microsoft and Netscape. Microsoft released a free browser on the market which at first wasn?t very good compared to Netscape?s browser which wasn?t free. The danger came when Microsoft?s browser became as good as Netscape?s, and later even better. Netscape?s mistake was that they failed to improve their browser and add new features to differentiate and have a marketing advantage. In fact, their later releases of the browser were much worse because it became bigger and slower compared to Microsoft?s browser.
Now, when you look at the competition between Microsoft and Google these days, there are similarities. But the clear difference is that Google continues to innovate and make their products better. They continue to add new features and capabilities to their products, so it doesn?t matter if Microsoft?s products become as good. Google so far still manages to stay a step ahead.

If you just can?t possibly improve your product and lower costs compared to your competitors, you?ll just have to admit this to yourself and quit that market and do something else. Preferably something new and unique. Something where you have the advantage of being the first, where you can create the market, define the market and define the playing rules.