New Business - How do I set a price for my product?

Question

This is my first question here, but since I am used to the Stack Exchange format I will give as much detail about my problem without giving an overload of details.

In a nutshell I work with US weather radar data and decided I could make an app for storm chasers and emergency management. I have done research and know about what my fees to customers will be, and I have an expectation of how many signups I will have. During the process of creating this, I have also created some custom data that I realized I could sell to weather data provider companies. They will not compete with my web app, so this would be great extra income.

This is where the problem is. A company has expressed interest in licensing this data from me on a monthly basis. Besides the cost of my servers (\$1,000 to \$2,000 a month?) I do not know how much to offer this data for. The last thing I want to ask them is "how much would you like to pay?".

To them, this would be helpful as they can re-sell the data to their own emergency management customers. I feel like it would be worth about \$1,000 to \$3,000 a month on top of server costs. It's not super revolutionary data, but it's going to be useful for them and they might be expecting to pay $8,000 a month (random guess). I am afraid to ask for that right off the bat because they may laugh it off. I am not a bashful person, but I don't want to come across so far left field that they just say nevermind to the whole thing.

I am looking for any sort of advice on how to approach this problem. I think the main problem with something new like this is that the actual value of the product seems either somewhat arbitrary, or the actual value could be anything within a range from \$3,000 to \$8,000 or more.

Answer 1

to answer this question you'll need a bit more information (which you may have or not at the moment). I'll assume that there's no competition for your app, and that there's no explicit price on the market (prices from other firms offering the same service).

First of all, you'll need to built a complete business canva and answer the following questions: (a) what's your mission?, (b) what's your long-term vision?, (c) do you want your business to incorporate economic and/or social impact considerations? Answering those questions will help you determine if you want to make a profit. Not every business needs to make a profit. You can have a small business and plan your price to cover only interest payments, labor cost, capital cost, and depreciation. Doing the business model canva will also lead you to evaluate your operating costs (what you need to pay to run the business on a day to day basis).

Here's a good reference to write your business model canva: https://corporatefinanceinstitute.com/resources/knowledge/strategy/business-model-canvas-template/. You'll need to detail all your operating cost according to those categories: https://www.strategyzer.com/business-model-canvas/cost-structure

Now that you have a better vision of your whole business, there's two main way to estimate pricing.

Pricing without profit

If you don't want to generate profit and only give yourself a good salary, you can calculate the price for your product in the following way:

\begin{equation*} P\ =\ OPEX/n \end{equation*}

In that case, the product price is equal to your total (annual) operating expenses (OPEX) divided by the amount of client you expect to sell to (n). A bit of market research will be needed to estimate the size of your expected clientele.

Pricing with profit

If you decide to generate a profit (ex: if you want to invest in your business for expansion, you'll need to set some money aside for advance payments), you can calculate the price for your product in the following way:

\begin{equation*} P\ =\ \frac{OPEX\ +\ CAPEX\ +\ SEI}{n} \end{equation*}

In that case, the price of your product is the sum of operating expenses (OPEX), capital investment expense (CAPEX), and social/environmental investment (SEI), divided by the expected number of sales (n).

Some advice

If you currently live in a medium-size or large-size town, I would suggest you to get in touch with the entrepreneurial ecosystem and support network. There may be some public or private business incubator that could provide you with advanced support and a office to start.