How to identify a reasonable pricing range for products using first principles?

Ah, this is an interesting question. Let's talk about how to price products using "first principles," much like Elon Musk. In essence, it's about finding a price range that neither shortchanges yourself nor your users.

First, forget all competitor prices and industry norms. Those are just reference points that can easily lead you astray. Let's start from scratch, building the price block by block, like LEGOs.

Step One: Calculate the "Floor" Price – Your Cost Baseline

This "floor price" is the minimum you can sell for without losing money. You need to meticulously calculate all your costs.

1. Direct Costs (Costs incurred for each additional unit sold):

   • If you're selling a physical product, like a cup, its costs would be: material cost of the cup itself + labor cost to produce it + packaging cost + shipping fee to the customer. These are costs incurred for every unit sold.
   • If you're selling software or an online service, its costs might be: computing fees, traffic fees you pay to cloud providers for each user API call, or the cost of sending a verification SMS.

2. Indirect Costs (Costs incurred regardless of sales volume):

   • This category is broader: office rent, R&D staff salaries, marketing expenses, utilities, etc. These costs are fixed and won't increase if you sell one more cup.
   • How do you allocate these costs per product? You need to make an educated guess about your sales volume. For example, if you estimate selling 10,000 cups a year, and your annual indirect costs are 100,000 yuan, then each cup needs to bear an allocated indirect cost of 100,000 / 10,000 = 10 yuan.

Alright, add up your direct costs + allocated indirect costs to get your "floor price." For instance, if a cup's direct cost is 15 yuan and its allocated indirect cost is 10 yuan, your floor price is 25 yuan. Selling below 25 yuan means you're doing charity; you'll lose money on every sale.

Step Two: Estimate the "Ceiling" Price – The Maximum Users Are Willing to Pay

This is the most crucial and difficult step. The essence of price isn't your cost, but the value you create for the user. Users will never pay more than the value they perceive.

How do you find this value? You still need to break it down. Ask yourself some soul-searching questions:

1. Does your product save users money?

   • For example, you've created software that allows a designer to complete an 8-hour task in just 2 hours. You've saved them 6 hours. If the designer's hourly rate is 100 yuan, your software has created 600 yuan in value for them. Wouldn't they feel it's worth paying 100-200 yuan for this feature?

2. Does your product help users earn money?

   • For instance, you've developed a sales tool that increases a salesperson's closing rate from 2% to 3%. A salesperson has 100 potential clients each month, and each deal earns 1,000 yuan. Previously, they earned 100 * 2% * 1,000 = 2,000 yuan. After using your tool, they earn 100 * 3% * 1,000 = 3,000 yuan. Your tool helped them earn an extra 1,000 yuan. Wouldn't they be happy to pay you a few hundred yuan for the tool?

3. Does your product provide emotional value?

   • This is more abstract but very real. Think of luxury bags or limited-edition sneakers. Beyond their utility, they primarily offer the satisfaction of "I have what you don't," a sense of identity, or social currency. How do you measure this value? You can look at how much users are willing to spend on other things to achieve similar emotional satisfaction. For example, if someone is willing to spend 500 yuan to watch a concert for happiness, then if your product can bring them an equivalent level of happiness, wouldn't it also be worth a few hundred yuan?

Add up these "money saved," "money earned," and "equivalents of emotional satisfaction" to get that fuzzy "ceiling price" in the user's mind. Exceeding this price will make them feel it's "not worth it" or "a rip-off."

Step Three: Find Your Position Between the "Floor" and the "Ceiling"

Now you have two numbers: a floor price (e.g., 25 yuan) and a ceiling price (e.g., users feel this cup is worth a maximum of 100 yuan).

Your final pricing will be within this 25 yuan - 100 yuan range.

The exact price depends on your business strategy:

• Want to quickly capture market share? Then price closer to the "floor," say 30 yuan. Go for thin margins and high volume to get more people using your product first.
• Want to go premium, emphasizing quality and value? Then price closer to the "ceiling," say 90 yuan. Serve that niche group willing to pay for high value and maximize your profit.
• Want a balance? Then choose a middle ground, perhaps 50-60 yuan.

To summarize:

Pricing with first principles frees you from the mindset of "what others are selling for."

1. Calculate costs thoroughly, secure the floor: Ensure your survival.
2. Deeply explore value, see the ceiling: Understand how much benefit you truly bring to users.
3. Based on strategy, choose your spot: Find the point between survival and thriving that best suits your current goals.

The biggest benefit of this process is that it forces you to thoroughly understand your business and users. When you can clearly answer all the questions above, the price you set will naturally be "reasonable."