Question

Topic: Customer Behavior

Finding The "sweet Spot" Price

Posted by Anonymous on 12/12/2010 at 12:00 PM ET 500 Points

I have a new product to launch. This product has some competition but not directly. Each product has an extreme set of benefits the other does not. The other products are on a price scale from $59 to $2000. Some are just more desirable/affordable than the others, yet all have something to offer. My product comes in an area that is unique to all.....It offers all the benefits all the competition offers, not to mention it appeals to the ones who won't or don't use any products currently, still doing it the way they did a 100 years ago, "by hand"(very laborious). So, here is where I get my pricing issues. I sure can't justify the $2000 price range.....$59 is less than manufacturing costs. So, I need to be somewhere in the area of $350 and $700 the lower is my bottom and the higher is perhaps pushing the envelope. Where do I set the price? In the middle? $525?

The $2000 buyers will see a bargain price breakthrough product. The cheap $59 buyers will also see a reachable benefit.....A percentage of the ones who do it by hand should also make the move. Is $525 the number? Do you drop just below $525 to $489 to reach the more price conscious customers? Am I pricing way to low with huge benefit offerings?

NOTE: 30% of the market will not buy the expensive models because of price. 40% will not buy the cheaper models because of low benefit offerings. The remaining 30% will have an interest in this tool because even with the product they currently use, this one will just do more, easier, faster, cheaper, safer, plus it's good to have this as an added product. In my head it should be the most expensive out there, but this isn't what I'm after. I want to find the sweet spot! I want to offer the best product for the best price for everyone involved.....We all know to cheap can hurt as much or more than to expensive.

How do I get there? The customer is savvy....This works to my benefit because a savvy customer will see the value. The guy who does this by hand will see the lower price than the $2000 model, and the huge benefits that the $59 model doesn't have. Where is the sweet spot? What price will make them jump? Where do I fit in?

This product is in the Construction Industry.
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RESPONSES

  • Posted on 12/12/2010 at 5:33 PM Accepted
    There is no stock answer to your question. Pricing Strategy is a specialty area within Marketing and has a number of considerations that you have not mentioned. Example: What is the objective? Is it to maximize sales revenue, gross profit, or net profit? Short-term or long-term? Or something else altogether -- e.g., razor and razor-blades (equipment/consumables) situation?

    I have done a lot of consulting on this and even have some ways to research price elasticity, but it will require a lot more in-depth involvement than we could possibly cover on this forum.

    If this is an important issue for you to resolve, I'd be happy to discuss and provide a proposal. There are a lot of things to consider, not the least of which are the market size/potential, marketing budget, objective (as referenced above), and distribution channel(s).

    If you want to discuss, contact me using the email address in my profile. Determining the right pricing strategy is often one of the most important factors in the marketing (and business) plan for a new product ... not something you want to guess at, if you can help it. Most of my consulting projects in this area have an enormous ROI for the client.
  • Posted on 12/12/2010 at 6:36 PM Author
    Hello and thanks for the reply. I will consider your consulting offer.

    My marketing budget is $50k a year for the first 3 years.
    My objective is to penetrate the market quickly and gain the brand...I'm sure knock offs will be in the works quickly.
    Finding the sweet spot to me meant selling as many as possible for the most money....I don't want to lose sales because of price.

    I would like to have a long term product...why would someone want a short term?(no sarcasm)
    This is a niche market and my budget is large for such a market. I plan to be aggressive.

    This product has no consumables...its a one shot sale and has a shelf life of two to three years. Most who buy this will want to purchase two or more for an added benefit. Market size...I have three separate markets for this, one of witch is over a million potential buyers and they have crews of anywhere from 1 to 50 and you can calculate times however many for each crew. The other markets combined come close to equal to the first mentioned.

    I am trying to learn as much as I can without hiring a professional until my funds are available. I obviously see the HUGE benefit of hired help in this area....right now I breathe and sleep this pre-product launch.

    Thank you.
  • Posted on 12/12/2010 at 9:36 PM Moderator
    But would you rather sell 100 of these at $2,200 each, or 1,000 at $200? If you assume a 25% variable profit, the first option will yield $55,000 in profit, while the second one will yield just $50,000. (on 10x the volume). And if you really believe that the product will be knocked off quickly, then isn't the goal to maximize profit short-term?

    And why is the marketing budget $50k per year? What if you could generate more net profit by spending $100k? Or perhaps $50k is too much for the anticipated volume.

    The pricing strategy needs to fit with the marketing spending to accomplish some clearly defined objective. You can't just treat pricing in isolation. It all has to be driven by your objective and overall strategy.
  • Posted by Jay Hamilton-Roth on 12/13/2010 at 8:10 AM Member
    You're better artificially setting the "list" price to the high end of your range, and then featuring an "introductory" price. It'll give you room to explore your "sweet spot". Also, you might offer different prices in different test markets as pricing experiments. Price is a function on perceived value - the more you help people solve their valuable problem, the more you can potentially charge for the solution. As for the "right" price, you might be wise to take Michael Goodman up on his offer when you've got the budget.
  • Posted by Gary Bloomer on 12/13/2010 at 9:40 AM Member
    Dear dspardue,

    Your best bet is to aim your message at people who
    will be price resistant, at people who are price immune.

    To this end I STRONGLY suggest you talk to another
    of this forum's top contributors, and that's Randall Montalbano.

    https://www.whitemountainmktng.com

    Randall's testimonials include:

    "Top 5 Channel Management Firms in North America"
    Canadian Trade Commissioner

    "Circle of Honor"
    University of Houston, Bauer College of Business

    “Top 3 Independent Marketing Consultants in World”
    (Out of 330,000+ International Marketing Professionals).

    Talk to Michael, and talk to Randall. You'll get STELLAR advice from both of them. I guarantee it.

    I hope this helps.

    Gary Bloomer
    The Direct Response Marketing Guy™
    Wilmington, DE, USA
  • Posted on 12/13/2010 at 9:44 AM Author
    I am very interested in talking to them....do they have websites or is this there marketing channel?
  • Posted on 12/13/2010 at 9:48 AM Author
    ooops sorry I overlooked the site...also found mgoodmans site. Thanks guys!
  • Posted on 12/13/2010 at 12:38 PM Author
    I sent an email via both websites, mgoodman and W.M.M.A. The W.M.M.A. site goes to an error from the inquiry page when I hit send.
  • Posted on 12/13/2010 at 1:28 PM Author
    And W.M.M.A. your phone number says not in service when I called three times to make sure.
  • Posted by matthewmnex on 12/13/2010 at 7:44 PM Member
    NEVER assume that you can't sell it at $2000.

    NEVER try to 'Justify' your pricing as you say.

    Set your price at $2000 and test it in the market. You may well be srprised at how m,any units you sell.

    Listen carefully to your distributors and then gently lower your pricing until you find the optimum reloationship between revenue generated and sell through volumes.

    The biggest mistake that any marketer can make is to assume that they actually know something about what the market wants and how much they will pay for it. Only the customers can tell you the answer to that so never sell yourself short (as you are doing here by saying I can't justify).

    ALways launch a product with a high price to build a value assumption in the minds of the buyers and then lower it carefully after scientific testing in the market. Play with dsicount offfers and special deals with your distributors untilyou reach optimum price.

    Remeber that a flat panel LCD Tv hit the market at 5,000 US dollars and now you can buy them in Walmart for almost pennies :))

    Good luck.

    Matthew
  • Posted on 12/13/2010 at 7:58 PM Author
    Well.....you can go have one made yourself for a $1000 Im not pulling numbers out of the air....I know my price range is in between $350 and $700. but thanks for your help everyone.
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