If revenue, sales, and other quantitative indicators were the only things justifiable when constructing pricing, income wouldn’t be an issue. Specifically, considerations regarding consumer value, cost-to-make, and competitive analysis should all be factored into deciding a final price point. And this is where we will be focusing in part two of Audio Pricing Models.

From our previous introduction to pricing models, we learned the foundations of how audio organizations can structure their products for sale. One-time purchases, recurring monthly subscriptions, or even a rent-to-own model provide manufacturers with various ways to justify how they charge their customers for a product or service. Depending on the business structure and the format, organizations may find that one method brings in more revenue than others. But revenue may not be the primary factor to consider. But isn’t revenue what makes a company money and generates return on investment (ROI)?

If revenue, sales, and other quantitative indicators were the only things justifiable when constructing pricing, income wouldn’t be an issue. Specifically, considerations regarding consumer value, cost-to-make, and competitive analysis should all be factored into deciding a final price point. And this is where we will be focusing in part two of Audio Pricing Models.

Fig. 1 Korg Booth at Superbooth

It’s not as simple as selling products to consumers and taking the money in as revenue. When we consider larger audio manufacturers (i.e., L-Acoustics, Bose, Sonos, etc.), the majority of the time they are financially backed by large investment firms and private equity partners. Like any business investment, we expect to see that return in cash; return on investment (ROI) is where businesses are focused.

But first, there has to be enough value built into a product that a customer would want to spend their money on. And once that aspect has been identified by product teams, considerations surrounding the following points become vital:

• Customer ROI Focus: B2B buyers focus on ROI. How much time or money can a music creator save per year with their software? This measures quantifiable factors.

   

• Strategic Positioning: Not just a cost or number figure, pricing itself becomes part of the company’s value narrative.

   

• Quantifying Value: As mentioned earlier, companies have to have quantifiable measurements of value. This can be in the form of productivity improvement, feature usage data, or revenue earned by a customer using the product or service.

Selling products to other businesses, like a studio, could justify a higher price based on long-term value (i.e., faster workflows). Regardless of the business in question, there has to be a balance between perceived value and ROI from an investment standpoint.

Let’s not forget that in order to build any product, whether software- or hardware-based, funds are required. In most cases, the price of a product doesn’t directly reflect the cost it took to make. Simply put, adding a markup or margin to the total cost of crafting and delivering a product reflects the profit being made from a sale. Here is a brief explanation of how that works in reality:

• • Hardware Development: The materials needed to manufacture a hardware unit can be costly in certain cases, especially when they need to be outsourced from foreign countries. Like software development, this also requires maintenance, engineering research and production, and physical testing—which often takes even longer than software to develop. To create a sustainable model, the production cost should be around 20% of the final price. If a unit sells for $3,000, it should cost no more than $600 to produce.

     

  • Software Development: Engineering hours, maintenance, updates, and more have to be factored into the total product price. If an audio VST plugin takes months—if not years, in some cases—to develop and requires top-tier developers, the markup may be high due to paying staff, testing equipment, and other associated costs.

     

  • Distribution & Licensing: Any costs associated with licensing platforms that act as resellers. In software, this could be an app store or online retailer. While these platforms provide a wide pool of opportunity to sell products on a national or global scale, they often deduct a percentage of sales. Especially for hardware, resellers must store inventory—the larger the product, the more it costs to store and deliver. Typical platforms take around 30% of the product’s price as a fee.

Looking more specifically at actual numbers and where they reflect, gross and net profit margins can have an influence. At the very least, it is important to know where certain funds and parameters are designated:

• Gross Margins: This covers overall cost of goods sold (COGS) such as parts and the actual labor to build a product. This does not include any form of salaries for employees; only the direct labor and actual parts/materials. For example, if a product costs $200, and costs $50 to make (for software, this is an advantage since no physical parts are needed to ship a product, for the most part), then the margin is 75%.

   

• Net Profit Margins: The more comprehensive measurement of overall profitability, this includes expenses like COGS, operating costs including marketing, salaries, rent, and taxes. This is where companies should really be looking to see if they are able to make any real profit. Software typical lands around 20 to, while hardware is around 10%.

Just because the means of development and distribution may already have been determined doesn’t mean that organizations don’t try to combat these fixed costs. In real-world scenarios, hybrid companies (software and hardware developers) sometimes bundle products together to reflect both content volume and production costs. This can be especially helpful when trying to optimize multiple products that need justification in the marketplace (i.e., a free lite version of software included with a hardware MIDI controller).

Fig. 2 Consumers Learning at Superbooth

Chances are, one product will be similar to a competitor’s version. Even if the similarities are small, perception of brand, quality, and other factors can influence a customer’s decision about which product to purchase. This is where perceived value can make a huge difference. Here are some considerations when approaching competition in the marketplace:

• Premium Pricing: The opposite can apply as well—increase the cost if the product is clearly differentiated from competitors’ equivalent items. This may require justification so customers understand whether the difference is truly unique; otherwise, overpricing could become a pitfall.

   

• Price Matching: If a product is similar in features, design, value, and more, prices may be closely anchored to market rates. Knowing the target consumer can help identify the acceptable range of the final price (including markups).

   

• Penetration Pricing: Especially as a new company, starting at a lower price may be beneficial to gain market share. Customers may see this as a relief when other brands are charging too much for their budget. Once market share increases, prices can as well.

This area is easier to compare with others in the marketplace. But just because it’s easier to compare doesn’t mean that decisions are accurate. One key takeaway is that customer verification is everything. Even if you think your product has an advantage over competitors, that doesn’t mean it’s true; customers provide the best insight.