This is a question that each new business owner grapples with.
For those without an official marketing education, the answer seems simple: calculate how much the material costs, how many work hours where required to manufacture the product, add advertisement, shipping costs and your profit and voila – you have your product price.
It is called the 4 ‘P’s: Product, Place, Promotion and Price.
But it gets more complicated than this: Price is a perception of value – it doesn’t have to be the actual value of the product. The customer has to feel that the product’s perceived value exceeds the price he is asked to pay. Pricing is a very delicate balancing act between over-charging and losing customers, and under charging and ‘leaving money on the table’. What if your calculations show that the product price you came up with is low to the standards of the market? Should you hike up the price? What if the price you came up with is more than your competition charges?
To price your product for maximum profit, you have to ask yourself the following questions:
● How unique is my product? Unique products can be priced higher because of its limited supply.
● How important to the customer is your product? The more important it is the more you can charge for it. Apple uses that technique, emphasizing how much their products will improve customer’s lives, and then charging as much as they want.
● What is the amount usually spent on a product like that? Your price has to be compatible. Look at Blackberry as an example. They came out with a tablet that costs as much as the iPad did, but wasn’t as good. They got crushed.
● How often will this product be bought? Is it consumable? Based on repeat customers? Then you want to retain those customers and price accordingly.
Decide what your objectives with the product are:
● Do you want to penetrate a market and gain customers? Is this a one-and-only product or a secondary product to the one you really want to sell? Or do you have a product that will be bought over and over again, like a consumable product? Then you might think of pricing low
● Do you want to get the maximum profit from this one product? Do you have a unique product that has a short window before the competition will come up with their version? Price your product high for maximum profit.
● Do you want to crush the competition and price low? It is illegal to squeeze the competition out of the marketplace. However, you can use it when you are competing with one or two.
● Do you want to continue with this line of business? If so, you want to create relationships with your customers by pricing at the lower level of cost+.
● Is your objective to be competitive? If you want to be considered for proposals, biddings and auctions, you have to stay competitive.
You also have to decide what your “teeter point” is. Teeter point was coined by Ken Evoy the co-author of “Make your Price Sell”, and means finding the price point that if you add only $1, you are going to lose the sale. To find the point ask yourself what price will be too high to buy the product and what price is just a bit too high. Your teeter point is between the two.
How you present your price to the customers is important:
How to make the price appealing? It has to do with human psychology more than with logic. Here is what works:
● Compare or contrast your price with another, similar product to show you come ahead.
● Offer installments to entice people to buy. The cheaper amount will be more appealing.
● Break down your price into components, total it and show the customers they are getting a good deal by buying the whole package.
● How to post the price? If the price of the product or service is under $10 – end the price with $.99, for obvious reasons. Between $10-$100 end with $.95 because $.99 seems greedy at this price range. Over $100 – Present the price in whole numbers.