I recently read a short book called, Don’t Just Roll The Dice, available as a free pdf. The book is about different pricing models and how they work, why they work, the psychology of different schemes, and how to choose the right model and prices for your business. DJRTD primarily focused on software, but as a lot of hardware often has a software connected component, it is still somewhat applicable. For example, the book talked about selling the Playstation and xBox as a loss leader but making up that revenue in increased game sales.
At around 70 pages, it’s a quick read; good if you have an hour to kill. The biggest lesson from the book is that, you shouldn’t be afraid to just pick a price that you think makes sense and then experiment with it in order to maximize profit.
In the hardware world, things are more complex than what the book described. There are many extra costs that need to be considered which are not a part of the physical product being manufactured. Things like shipping, tariffs, tax, support, returns, defective parts, assembly, licensing and certifications. Additionally, there are months of delays between placing an order with a supplier and receiving the finished product. People are present for every step who siphon off a chunk of the profit. There is a lot more risk outside your control. As a general rule, hardware pricing takes the cost of the goods sold and multiplies it by 3 or 4. That means every product you buy probably was produced for 1/3 to 1/4 of the price you paid, which is kind of amazing when you look at all the technology packed into a TV or computer. All that markup is necessary because moving physical things around is expensive.
Bob Baddeley is a software/hardware engineer from the USA. In 2012 he was chosen for a Chinese hardware startup accelerator to work on his product, the Portable Electronic Scoreboard. His articles can be found on his blog www.engineerinshenzhen.com.