Properly pricing your product can be one of the trickiest steps of a new product launch. Pricing too high causes problems, pricing too low causes problems, and pricing just right is really hard to do.
But it doesn’t have to be.
There are a few simple steps you can follow to make sure that your prices are set correctly in terms of aligning with the competition, appealing to your customers, and covering your costs.
As you surely know, adjusting your prices according to the competition is an extremely important factor in your pricing strategy.
Although your competitors probably won’t be ecstatic about sharing their pricing strategy with you, don’t give up hope. You very well may be able to obtain the information you need, but just from a different source.
A company who exists in the same industry as you but is geographically located somewhere else will likely be willing to talk to you about their pricing structure, as you don’t present a threat to them. Ask them what prices they charge, how they arrived at those prices, and how and when they raise them.
Asking a company about their pricing structure can be a great starting point in understanding the formulas, factors, and decisions that go into pricing a product like yours. However, it’s important to be wary of the possibility that this company’s pricing strategy may not be optimal.
There’s always a chance that they may be pricing too low and missing out on profits, or pricing too high and losing profits. To avoid doing the same, there is a simple step you can take.
Talk to people.
Asking people what they would pay for your product will either validate your current prices or teach you that you need to rework your pricing strategy.
“If a product costs a dollar to make, many companies assume they should charge $2 for it. “That’s what you call cost-plus pricing. Many companies do this, but it’s not optimal,” says Mark Stiving, author of Impact Pricing: Your Blueprint for Driving Profits (CWL Publishing Enterprises, 2011). “Pricing should only be based on what the customer is willing to pay. If the customer is willing to pay $1,000 for a product that costs you $10 or even $100 to make, you have a successful product. If the customer is willing to pay $1,000 for something that costs $1,000 to make, you don’t raise your price — you get out of that business.”
You can begin to figure out how much people are willing to pay for your product by asking them:
Once you learn what a customer is willing to pay, you’ll be able to evaluate that number against all of your costs.
It is crucial to include all of your possible expenses when deciding the feasibility of your pricing strategy. Overhead costs like rent and insurance, your own financial position, and the possibility of an unexpected costly event are all factors that need to be accounted for.
Once all of your expenses are determined, you can figure out how many units you will need to sell to break even and hit your desired profits by using the price that your customers said they’re willing to pay.
If your math concludes that you need to sell 10,000 units per year to break even when you had previously planned to profit after 8,000, you’ll be patting yourself on the back for taking the time to crunch some numbers. Doing the math early on allows you to evaluate and alter your pricing strategy before crisis mode.
Once you know that your prices will promise financial security for your business and yourself, you can begin making more advanced pricing decisions that affect your branding and sales.
Prices affect brand image and perceived quality. For those of us in the midwest, a relatable example occurs during the colder months when we are winter coat shopping. A more expensive coat eludes to a higher quality, while a lower priced coat appears to us as cheap and ineffective.
No matter what you’re selling and who you’re selling to, it’s important to be mindful of the widely supported ideology that “you get what you pay for.” However, if you are targeting your product to a market that primarily leans toward inexpensive prices, increasing your prices to imply a high quality probably won’t be effective.
Mastering the finesse of pricing that boasts product quality takes a bit of trial and error, but it can absolutely pay off, as companies like Patagonia, Nike, and Apple have shown us.
If brand recognition hasn’t yet allowed you to price your products at a steeper price, there are pricing techniques you can use to boost your sales.
You can give your customers a choice between products that sit at different price points according to the features they offer. Offering at least one higher-end product that costs more will help you capture a few customers who are willing to pay the extra amount to get higher quality and more features. Similarly, offering at least one product that is of average quality and price will ensure you don’t miss out on the majority of the market.
Products presented in this way are referred to as a vertical assortment, meaning that all the products are essentially the same, but just with more or less features and gadgets.
Another way of presenting products is in a horizontal assortment, which is a group of products that are all of a similar price point, like the iPhone 5C in all its different colors.
Offering products in these ways often increases the likelihood that a customer will buy. However, it is important to keep in mind that too many options can sometimes overwhelm a customer, causing them not to buy at all.
For some companies, it is possible to offer a bundle of products, encouraging a customer to buy multiple products for a lower price. For example, Microsoft bundles its programs like PowerPoint, Word, and Excel into a reduced-price bundle called Microsoft Office. Combining products together in a logical package takes the stress off a customer’s shoulders about which individual items to buy, and turns over into more sales for you.
Pricing your product correctly can determine whether or not you profit from your sales, and therefore can determine your business’s success.
Evaluating your competition, asking people what they’re willing to pay, and crunching the numbers to determine your bottom line are three vital steps to ensuring your pricing strategy is feasible and logical. Once you are assured that your prices are financially sound, then you can begin to make decisions about more advanced pricing strategies for your products.