Properly pricing your product or service is key to your business’ success or failure. Smart pricing strategy starts with understanding the market price, which is the average price charged by all your competitors & the price at which their product or service is generally valued in the marketplace. You can then choose to charge a premium price (if you have a superior, value-added product or service), a discount price (which is generally hard for small companies to sustain) or a price similar to the competition’s (market price). Here are some other pricing considerations:
- Channel: You may need to vary prices depending on your sales channel. For example, if you sell directly to consumers as well as to retailers/resellers, you’ll have to charge the retailers less so they can charge the same retail price you do & still make a profit. If you’re selling to businesses, consider the type of business & price accordingly. Small businesses have lower budgets, while big corporations have more to spend.
- Markup on cost: Some companies calculate pricing based on a markup on their cost to produce the product or service. Your market research should show you average markups for your industry.
- Bundling: “Bundling” means you charge lower prices when customers buy more than one product or service. For instance, if you offer website design, Web hosting & email marketing services, you might charge less when customers sign up for all three of your services.
- Target market: Consider your target market in setting prices. For example, if your target market is a sophisticated buyer, then you will probably need to include some costs (reflected in the price) to deal with a higher level of customer service than other customers.
- Promotional pricing: Many businesses offer sales or promotional prices to entice new customers or to encourage customers to buy more.
Setting & Adjusting Prices
Pricing isn’t a one-time task, but an ongoing effort. As your new business gets off the ground, you’ll probably have to tinker with your prices until you find the right formula that increases both sales & profits. You’ll also need to adjust prices as market conditions change & as your business grows. Here are the steps to follow at each stage of the game:
SET YOUR INITIAL PRICE:
- Consider the costs of making your product or providing your service, plus profit.
- Know the competition’s price & whether you will match it, beat it or charge more.
ADJUST YOUR PRICE AS NEEDED:
- Monitor customer demand. Is your product or service selling? If not, rethink pricing.
- Compare your sales to the competition. Are your sales similar to or better than or worse than theirs?
- Ensure your providing value commensurate with your price.
- Consider using credit terms or bundling products/services to make your offerings more attractive.
- Before increasing prices, look for ways to reduce your costs.
- Setting your prices too low may sound like a great way to boost sales. In reality, prices that are too low disrupt the marketplace by leading to a price war. Unnaturally low prices cannot be sustained & in a price war, the new business suffers the most. This is one war you cannot win, so don’t even start.
Pursuing A Premium Price Strategy
I have found while mentoring startup businesses, that it is enticing for most inexperienced startup entrepreneurs to want to pursue a pricing strategy that prices their new offering at or below their competition. The reason that they give for pricing low is to gain market share but, in most cases, it is really because the entrepreneur is scared to price their product too high. While a low-price strategy can be effective for some types of businesses, it could be very harmful for a company that offers a product that is truly unique & better than its competition.
Price Communicates Value
Most consumers have a preconceived understanding of what price indicates, namely that price is related to quality. Of course, this is not true for everyone in every situation, but it is generally accurate. It is therefore very difficult to compete on both quality & price simultaneously. Have you ever found a product that truly is the lowest price but highest quality in any industry? So, if your company product or service is truly better than that of the competition, & you can clearly identify & effectively communicate this differentiation to consumers, then you should not be pursuing a strategy that is lower in price. You must include the added value in your price. As new businesses build their brand consumers have only one way to quickly interpret the quality of their offering…the price. If your lower price is the first thing that your new consumers see, there will be an interpretation of lower quality.
Case study: I had one of my consumer product companies introduce a product at $99 that the competition was selling at an average retail price of about $10. The result was a huge success & it increased the total market for that type of product…all because it could be demonstrated through use & clinical studies that it was better than any other product on the market.
Problems Raising Price Later
Some businesses will justifying pricing lower in order to quickly gain market share, arguing that they will raise their price later. This is difficult & could be potentially damaging to your brand. Few things turn a customer away more than a price increase…no matter the reason. Even if the reason is out of our control like raw material price increase or trade tariffs, consumers expect the company to absorb it. If a price increase in unavoidable, consumers will demand more value.
Pursuing a Premium Pricing Strategy
So what should a new business do? For starters, every business needs to make pricing a critical part of the strategic planning process. Start by determining which pricing strategy you will pursue & stick with it. If your company really produces a product or service that is clearly differentiable in terms of quality & value, than pursuing some level of a higher price strategy is best. Here are a few options:
- Introductory Rebates
- Consider setting your price higher & offering “introductory offers” to get consumer to try your brand. This includes coupons, discounts & even free samples. In addition to getting the product into the hands of your consumers, it also makes them feel good to believe they are being rewarded for being early adopters.
- Case study: Every app that is free to download but has in-app purchases, or those that offer an introductory trial period.
- Skim Pricing
- All products or services go through some iteration of the product life cycle.
- Even if your company owns some proprietary asset, at some point, competition will figure out how to improve on your business & provide a better alternative. For this reason, all companies need to have a plan for dealing with products that will eventually transition from competing on quality & value toward competing on price.
- By managing your product portfolio with research & development, your company can ask a higher price for your product early in the life cycle & adjust pricing as competition moves in or new offerings become available.
- Case study: Any company that produces products that consumers eventually upgrade, such as cars, mobile phones & televisions.
- Consistent Premium & Niche Pricing
- One option you can consider is simply setting your price high & building a strong brand around the value you offer. This means understanding your consumers & staying true to your strategy.
- This idea is risky for a couple of reasons. First, it is typically difficult & more expensive to build a brand based on value & if your product fails in any way to deliver on its value proposition, it can irreparably damage the brand. Second, by pricing higher, you will reduce the willing buyers market size, & although you will be earning higher margins on each sale, this idea can be difficult for entrepreneurs to stomach.
- This strategy requires a great deal of confidence & courage to set a higher price & embrace the brand you want to build around it. With that said, if your company truly offers that value & you are confident & passionate about it, then your consumers will reward your courage.
- Case study: Premium luxury brands, such as those in clothing, such as Burberry, Versace and even Nike that goes so far as to destroy merchandise rather than put it on sale.
For more thoughts on product/service pricing, search the Library for the key words like “product pricing”.
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