When bringing a product to market, pricing is often the last frontier.
Image credit: Boston Public Library on Flickr
Pricing is very difficult to navigate, understand, and — ultimately — conquer in a way that makes sense to you, your investors, and most importantly, your customers.
Although you may have an idea of what price point at which your product or service should be positioned, the marketplace ultimately casts the deciding vote. For example, you may decide to announce to your customers that your product is worth a “premium” price, but just saying that it is premium does not make it so. Your customers will drive pricing unless you carefully weigh all aspects before releasing the product with a given price tag.
So, be honest: how have you arrived at your price point in the past?
The Popular Method (but does it work?)
One popular method in arriving at a price is testing a given price live in the market.
Certainly, testing can be noteworthy in that it will provide a marker to show what your product is worth, but it can also backfire. There is risk in putting a price out there to “test.” Today, everything is saved on the internet as public record, so if you go back and change your price — either by raising it too high or cutting it too low — it will leave a certain impression on your prospects. If you release a product at too low a price, you will have a hard time convincing customers to later buy it at a higher (albeit more reasonable for you) rate.
Similarly, if you release your product at too high a price and later lower it, you may end up giving the impression that somehow, your product has failed to do well — and this could, in fact, lower the pricing even more. Inc. Magazine reports that “charging too little is far more dangerous: a company not only forgoes significant revenues and profits but also fixes the product’s market value position at a low level,” and that, “80 to 90 percent of all poorly chosen prices are too low.”
So although “live testing” is one method to arrive at a price, it has significant risks in the way the test itself affects how the market perceives your value.
Introducing “Price Framing:”
Before you begin, you must establish or choose the category “range” for pricing your product or service. (Note: I know this is no easy task. I also realize that these “tips” I’m giving you are at surface-level. What I can tell you is that we have developed a very specific method called “Price Framing,” and this blog is just the tip of the iceberg. There is a forthcoming white paper on the subject.)
Now, to begin, you must establish or choose the given category that you plan on competing in. This is important in understanding your specific price range. In other words, to arrive at a price, you will need to know who is at the top end of your price range and who is at the low end in order to establish where your product falls.
For example, let’s say you’re selling whiteboard markers. You must establish the ceiling and floor prices. Perhaps the most expensive marker out there is $3.00 — then you would write in that number in for the ceiling price. Maybe the least expensive marker is $0.75; write in that number in for the floor price. The midpoint is the exact average of the two (so in this case, $1.88), and the range is how big a spread there is between the two (so in this case, $2.25).
This is only the beginning in your efforts to price your products in an accurate way. Various other factors need to be explored, but they generally fall under two categories:
- The Customer’s Point-of-View
What the vendor believes is true in the minds of their customers. It’s an outside-in view — a healthy view of what is going on in the market, and an understanding of what is going on with the customers.
- The Vendor’s Point-of-View
What the vendor wants to accomplish with the product offering. It’s an inside-out view — knowing what the vendor wants to accomplish and why.
There are multiple questions that must be considered and analyzed from both perspectives, and I’ll discuss these at lengths in follow-up posts. What’s important for you to realize is that pricing is both an art and a science, and it takes looking at your products and/or services from many angles to determine what is fair to you and your customers. Yes, it is a long process — but it’s much better than playing the guessing-game.
Ultimately, pricing in this way — what I call “Price Framing” — will begin to show you a range for where you can price your product. That way, you can set your own price based on the range; if the market indicates that the price is either too high or too low, you will be able to play around with the price without drawing attention to price discrepancies.
- How have you arrived at your price points in the past? How has it worked out for you?
- What pricing methods do you swear by? What pricing methods do not work, in your opinion?