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Pricing Strategies
Posted By: muddin on 8/5/2005 10:21 AM (CST) 125 Points
How to price products

Posted by: AndrewS Accepted Answer
8/5/2005 10:39 AM (CST)
I worked for a business (i dare say industry) that learn the hard way how to price a product.

First you need to fully understand how much it costs you to deploy or deliver the product. FULLY means FULLY, work through the typical orders you might get and work out the manpower costs (these can be significant for complex orders), you should already know how much it has cost you to get the product, either to develop or buy in.

Add the two together.

Then add a margin (depends on your product on how much margin you expect to make).

Then see of the market will stand that price. What do competitors price there products at etc ?

If there is a difference, do back to your supply chain, or internal processes and see if costs can be cut somewhere!

Think about psycological pricing points ... these end in "99".

Hope that helps
 
Posted by: DT* Accepted Answer
8/5/2005 11:11 AM (CST)
I try to avoid cost plus pricing and base it around price, performance and value for money relative to the market.

First, review any existing products you have. Can you succesfully argue that there is a sensible range hierarchy of price vs performance?

Second then overlay that with the competitive set. Are you providing value for money? If not what are in the implications longer term? Are you suffering from delining sales? Are you over providing and manage out more profitability?

Finally, I would always advise providing a better product at a specific price point vs the competitive set.

Wrap all this up with some good comms and you have the recipe for success.

I basically approach this as Ford did, give me a $500 dollar car becuase consumers will buy it. Then figure out how you are going to do it.

There is loads of stuff on this subject, but the above has seen us launch a new product, treble % margin in the product group, stick an additional 7 figure contribution into the business and double volume.

Regards

DT
 
Posted by: rob Accepted Answer
8/5/2005 12:51 PM (CST)
First and foremost, you obviously have to make sure you price the product to cover manufacturing and distribution costs. I'd also look very carefully at the product's market position and competition, and price accordingly. How you position the product in the market will impact the price as well as how you position it against the competition.

I agree that the final price must be equaivalent to the value received by the customer. I still think you need to make sure you cover your costs while still obtaining the right price for the product. Value, as I use it, takes into account performance as well.

 
Posted by: mgoodman Accepted Answer
8/5/2005 8:41 PM (CST)
Rob is right on-track. The driving consideration in pricing is value to the customer. If it's not a good value, they're not going to buy.

And if you're not making money, you're not going to be around very long.

So you need to deliver a good value at a price that your customers will find attractive.

Pricing is very much an art. There are formulas and articles that deal with different approaches, but the best pricing strategies are so intertwined with the total marketing strategy and the business plan that you really need to consider each case on its own. No simple "rules" that apply to every product and every industry.
 
Posted by: Agnieszka Accepted Answer
8/6/2005 10:57 AM (CST)
Pricing is the most critical issue to your sucess and it is also the most difficult question to answer. You have to think about your strategy first and then look at your market.

As you do not state what products you mean let's give an example; say you sell shoes.

In the US market, you can buy shoes for $10, $100, and $1000 (and this is not the limit).

Surely, there will be differences in quality and design. At the upper end, there is also strong differentiation customer service, guarantee offered, store layout and location. People who buy shoes in these price ranges probably belong to different groups, with different needs and desires.

So you need to see what niche in the marketplace will be yours; who is your potential customer; what are their requirements and needs; how much they are willing to pay for your product (if anything at all, as mgoodman says). If your business idea is correct, this will be more than your costs per unit. And even if the cost-plus pricing method is rather obsolete now, you obviusly need to know what margin you're going to make.

As for the basic question, there are different pricing strategies in different situations - there is no better entry level text on these than the Kotler's Marketing handbook.

Well, actually yours is a 2-in-1 question.

There are pricing strategies, as discussed by Kotler, and that's what we are all discussing here. A pricing strategy says how much you want people to pay for your product, how many people will buy at this price and what you need to deliver. You need to have all three elements for a successful strategy, not only price.

There are also pricing models designed by the finance people, sometimes simple, sometimes based on sophisticated maths. Although they are used mostly in financial markets, where time and risk play a very important role, some models are useful also for ordinary products. The drawback is that you usually need a lot of data to make your model work.

An example of what I mean:

A client of ours divided all stores into 5 groups according to the price gap between their product and their main competitor's. They found that they make most money if they are 10% to 15% more expensive than the competitor. As the result, all sales reps were told to advise shopkeepers about recommended price which was set at the store level, according to the competitor's price found there. This worked for more than one year!
 
Posted by: Agnieszka Member Response
8/6/2005 11:55 AM (CST)
I almost forgot to mention. If you are interested in a discussion of pricing research methods, pls contact me directly and I'll send you a presentation I prepared for my clients some time ago.
 
Posted by: thinkmor Accepted Answer
8/8/2005 9:53 AM (CST)
Hi Muddin

Michael (mgoodman) is right, your pricing should be determined by Value perceived by consumers not costs.

Value is the perceived quality of your product/service x Price by consumers. Quality is the consumer opinion on your product/service proposition compared to your competitors.

Remember also, strategic pricing integrates with your branding strategy so don't try and treat Pricing in isolation.

For more indepth information, I recommend you read the well known "The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making" by  Thomas Nagle, Ted Holden, Reed K. Holden

http://www.amazon.co.uk/exec/obidos/ASIN/013122753X/ref=pd_sim_b_dp_4/026-2...

and Winning the Profit Game: Smarter Pricing, Smarter Branding  
Robert G. Docters, et al

http://www.amazon.co.uk/exec/obidos/ASIN/0071434720/ref=pd_sim_b_dp_1/026-2...

Hope this helps.

Zahid Adil
 
Posted by: SRyan ;] Accepted Answer
8/12/2005 1:35 AM (CST)
Check out the MarketingProfs tutorial page for some great material. It includes three articles on PRICING.
 
Posted by: Wiglaf Accepted Answer
8/13/2005 3:16 PM (CST)
Start by understanding the value that you provide in excess of all other competing solutions to the same challenge, the price to that value.

If what you sell is differentiated, providing value greater than the commodity level, then you should price to that value.

If you are launching a truely new to the world product, than price high and let time lower the price. (In this case, you will be truely alone in your newly defined market)

Value Percieved, as others have mentioned, is the key.

See if this helps.
Price Boundaries
http://www.wiglafjournal.com/Articles/2004/2004-02-04-PriceBoundaries.htm

Price Framing
http://www.wiglafjournal.com/Articles/2004/2004-07-21-FramingPrice.htm

Price Setting
http://www.wiglafjournal.com/Articles/2003/2003-04-30%20Pricing.htm

Happy Profiting.
 
Posted by: sureet* Accepted Answer
8/17/2005 6:00 AM (CST)
Pricing differs from product to product and market to market but I would like to put the following methodology in place. The idea is to look at the entire scenario and then arrive step by step to an indicative price.

1. First find out the costs. This sets the floor below which you obviously cannot price your product at a profit.

Costs will include

1a. Cost of making the product
This includes raw materials, labour, portion of factory overheads.

1b. Storage costs
Cost of storage space you pay for holding inventory.

1c. Transportation costs
Cost of transport from factory to your warehouse and from warehouse to retail outlets.

1d. Indirect costs
Salesman's salry, commission, other overheads etc.

Having got the costs, find how much you intend to sell i.e. the sales forecast to arrive at cost per unit. Here, it is always better to have 3 estimates - pessimistic, normal and optimistic.

2. Next look at the market for that product category.

Is the market growing or is it stagnant ?
A growing market means expanding demand, more space for competitors and therefore more scope for a higher price.

Is the product category totally new ?
If the product category is mature this means customers are knowledgeable about the product and have set views about price which are difficult to change. But a new product category for example Blue Tooth in mobile phones, means consumers are still not fully knowlegeable and are less price sensitive.

So a growth market and new product category favours higher pricing.

3. Now look at your target customers.

To which income class do they belong to ? Do they perceive the product as a prestige product to be possessed to show off or is it meant to serve some basic functional need ? How is the product consumed (in private or in a social gathering where importance of making the right impression is important)? Is the product linked to something which is very dear to the customer (for example, safety, health, to be given to a person dear to the customer )?

So if customers are well off, link prestige to owning it, is used before other people, at important occasions or is linked to something of importance to the customer, then the price should be high.

4. Now is the time to look at competition.
Now we need to see how competitors are serving our target customers.

What is the range of prices for that product from high to low ?
Price usually indicates the value customers place on your offering. Low price means a basic offering while high price means you get more image value, better quality, better or more service.

From point 3 above we know what customers we are targeting and the importance they place on the product. From this we can select the competitors who are serving our customer segment. This will give us the high and low of the pricing band.

Check the total number of competitors serving your customer segment.
The more the number of competitors, the more price sensitive your customers.

5. Now look at your product.
How well does it meet your targeted customer needs ? Does it do it better ?
Is your advantage unique ?
Is it innovative ?
Is it hard to duplicate the advantage ?

If yes then you can price your product at a premium. From the price band arrived at in point 4, you can now set a price.

6. Last is to look at your strategy.

Brand strategy
Is your brand perceived to be premium ? Then you have to price its accordingly.
Do you plan a price skiimming strategy ? This is possible if your product has unique advantages which customers want.
Or is it to be a price penetration strategy with low prices and good quality which offers customers more value ?

Competitive strategy
Is a low price going to draw immediate response from your competitors ?
Is your price a threat to any big competitor ?

So answers to the above will help you to reach the right pricing decision.
 
Posted by: shadysamy Accepted Answer
8/17/2005 11:14 AM (CST)
Well, as most suggested, one of the hardest things would be pricing a product because it does not only shoulder your actual expenses.

For reference you can never start production of a product before you make a full strategic plan to set a price. The price should be built based on competitive products in the market already as well as your target audiences buying power.

But since I assume you have already worked on the production of a product and haven't yet priced it, we'd have to move forward from there. First and utmost essential factor are your assets (i.e. machinery, equipment e.t.c) you'd have to calculate your assets against your depreciation factor. Then you have your manpower, what you'd need to do is build a rate card for each individual class you have working on the product. You can't use the actually incomes, it would make you on the line.

Lets take an example. If you had 3 individuals working, the first with a $100 salary monthly the second with a $200 monthly salary and third with a $300 mothly salary.
You'd place a rate for each individual / day e.g. the individual that takes $100 monthly could be rated at $20 / day depending on his/her effeciency and output... and so on even though he/she were paid less.

Then you have to well structure your target audience and see which class you're specifically targeting to insure the product would be affordable.

That then takes you to the direct competitor products in the market. Make sure you have a list of all products and their prices against their market share, to know who's doing what where.

You have main 2 different strategies in selling against price:
- The Low Trailer Price Rule
- The High Boost Price Rule

The low trailer price rule is based on achieve maximum market shares by killing your profits to the minimal and having a minimal budget on marketing expenses. Thus making high profits against a large market share.

The high boost price rule is based on achieving minimum market shares by increase your price to a maximum possible and having a high budget on marketing expenses. Thus making high profits against high profit margins and not market share.

A typical example in the pharma industry would be Avandia & Glucophage both Diabetes medications in the same class and exact components but a huge price difference .. units sold Glucophage is much higher but profits Avandia is much higher.

Well there are a lot of other factors as well that you might need to consider... but make sure you play your cards right and remember there no success in any product if it ain't supported by a decent marketing campaign.

Just for tips check out the following website:

http://www.how-to-price.com/
It might help although it's not 100% complete.

Cheers and best of luck.
 
Posted by: Whet* Member Response
8/18/2005 10:02 PM (CST)
Price it high and everyone wants it.

Price it low and nobody cares.

Perception is everything.
Positioning, and marketing are key.

Cheryl Waters
 
Posted by: Mushfique Manzoor Accepted Answer
8/20/2005 12:08 PM (CST)
hi there

great response from experts. Sureet has covered the entire gamut of the pricing mechanism. my 2 cents are...

your pricing strategies should first include the cost components, how much the total cost of production for each unit.

you are supposed to add a profit margin/mark-up over your cost to come to a price. In determining the margin i suggest you to look first into the the product proposition, the positioning and the value proposition of your product/brand. based on those you decide the margin to come up with the pricing.

another factor to remember in determining the pricing strategy is the method of distribution of your brand. every tier of your distribution channel has to be given some profit margin, so you have take into account that to come up with your end price or MRP.

hope this helps.

cheers!!
 
Posted by: telemoxie Accepted Answer
8/23/2005 7:25 AM (CST)
Your ability to set price will depend on the uniqueness of your offering. If you are selling bushels of wheat, the market will set your price, despite the great advice above.

One factor I would strongly weight is the prospect and buyer's perception of your price. Most firms I have worked for (other than in government bid situations) like to price their products just a bit higher than the competition (especially when we have a competitive advantage) and sell the relative benefits.
 
Posted by: Shelley, MProfs Moderator Response
8/27/2005 6:30 AM (CST)
I am closing your question since there has been no activity in over a week and it's getting stale. Next time you post something on our forum, please have the courtesy to reward the contributions of participants in a timely manner. Visit the Important Guidelines page to learn how to use KHE with style and grace.

Thanks for participating anyway, everyone! Given the nature of this vague question, you've outdone yourselves.
 


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