Question:I have a new product, but I don't know how to price it. Where do I start?

Answer:Methods for pricing a model are numerous. One model, called the EVC, prices goods from the customer's perspective. For more on that, visit our tutorial. But before pricing a product, you should consider five basic questions. The follow below.

1. Alternative Solutions: What alternatives do buyers have for solving their problem? Are they aware of these alternatives? Customers who are knowledgeable about competing products generally use the prices of these products as a comparison point.

2. Ease of Comparison: How difficult is it for buyers to compare the products of other suppliers? Can the benefits be easily observed, or must they be experienced first? Obviously, this is a reason why firms often let customers have a free trial. This lets the customer easily compare the products of different suppliers. Not allowing customers to try out a product whose benefits are not easily observed prior to trial makes pricing aggressively nearly impossible.

3. Unique Benefits: Does the product have any unique benefits that differentiate it from any competing products? Do customers feel these unique benefits are very important to them?

4. Monetary Significance: How significant are buyers' expenditures, both in absolute terms and in percentage terms? Say, for example, that you sell an add-on to a customer’s ISP expenditure, like some new plug-in to help customers more efficiently manage their downloads. If their ISP costs are $19.95/month and you sell your add-on for $5.00 a month, this is a relatively small dollar figure, but roughly a 25 percent increase to the customer! Expect customers to focus on the percentage, not the absolute.

5. Complementary Costs: To what extent must buyers make complementary expenditures in anticipation of its continued use? Are buyers locked into these expenditures?

For more on pricing, visit our tutorial.