Pricing a Product

Pricing a Product

Date: August 21, 2012

Pricing a ProductPricing a product can be stressful and confusing. In many ways, it’s like walking a tightrope. Price it too high, and you fear scaring customers away. Price it too low, and your profit margins sag no matter how many you sell. What you really want is the “Goldilocks price”, the just-right price that enables you to sell as many products as possible as profitably as possible. So how do you get there?

The first step is to review our previous article “Estimating The Cost to Produce Your Product” if you have not yet done so. In this article, we advise researching your material and labor costs to determine what it costs in total to produce one product. At bare minimum, any price you assign to your product must incorporate this cost.

Of course, the goal of business is not to simply break even – it’s to make money! Then again, we already established that you cannot just add any old arbitrarily high amount to your price and hope to succeed. Here are some questions whose answers will tell you what price to settle on.

1)      What are your competitors charging? Don’t say that you have no competitors. You’re either not looking hard enough or (worse), there’s no market for your product. In all likelihood, you do have competitors. Even if they only sell a similar product, this can be used for comparison purposes. Once you determine who they are, find out what they are charging. No, this does not mean you have to automatically adopt their price as your price. That would be mindless and probably inaccurate. Rather, use the prices of your competitors as a starting point. At this stage, it may help to average your competitors’ prices together and use that as the starting point.

2)      How is your product different and better than your competitors? One of the biggest deciding factors in price setting is differentiation. In what ways is your product meaningfully better and different than that of your competitors? Too many inventors rush to say “we’ll charge less, and that’ll be our difference.” But unless you are in a true commodity market (like screws or lumber) this is a losing strategy. As the old saying goes “live by the cheapest price, die by the cheapest price.” A product whose only or primary selling point is “it’s the cheapest” will be displaced by anyone who comes along and undercuts you. Who wants that? As the developer of a specialized, difference-making product, you should be able to emphasize at least one meaningful attribute or quality that competing products lack. The more of these you have, the more you “de-commoditize” your product and can justify charging an appropriately higher price.

3)      What part of the market do you envision reaching? Different segments of customers often comprise and co-exist within given product category. For example, the broad category of “cars” includes economy cars, luxury vehicles, heavy-duty trucks, corporate fleets, etc. The category of “food” includes junk food, basic fruits and vegetables, frozen TV dinners, fine organic delicacies, and the like. The category your product falls into is probably divided along similar lines. There are products like yours for cheap/economy use, mid-range use, and premium/high-end use. Which segment your product occupies is largely a function of your product’s quality and desirability to that segment. If you say “I want to go after the high-end segment of the market”, you need a compelling reason(s) why that segment of people will pay a premium for your product. Lacking those reasons, you may fall into the mid-range or economy segments. Which one you settle into also influences what your price should be (and which competitors you should be comparing yourself to.)

4)      Do you want to sell a lot of your product for a low price, or a little of your product for a high price? Neither strategy is inherently better. What should determine your choice, again, is the nature of your product. If you are selling, say, a new kind of garage door opener, you will probably need to sell more openers to more people, at a lower price, to make a profit. But if you’re inventing a new laser engine turbine for factories, you will probably want to price this highly and focus on selling to a handful of big, long-term customers.

Should you strive for a low price?

We’ve already cautioned you against competing on price. But should you, in general, strive to have as low a price as possible? Probably not. Many entrepreneurs assume that since their product is new, unproven, or “beneath” an established brand, they should charge less. After all, how could they expect people to pay more? However, this is generally inaccurate. A product’s price changes people’s perception of it. If you truly see your product as being on par with or better than a competitor’s, the price needs to reflect that. Otherwise, the consumers you are trying to reach will equate your lower price with lower value or quality.

Concluding Thoughts

If this all sounds like a lot to consider, it is. Truth be told, pricing a product is one of the trickier tasks in business. There is no universally accepted “formula” or system for doing it. However, questions like these will get you thinking about the real and pressing factors that demand consideration in pricing.