In this post, I explore how to price your product to extract maximum value. I went through a steep learning curve with pricing my product and hopefully I can spare you some of that pain.
There are a lot of websites with solid information on different pricing strategy. The most intuitive is that you add up all your costs and then apply a mark-up that will result in a healthy profit margin for yourself. Now this sound kinda logical right… but is it that simple? Of course not! You can actually end up leaving a lot of money on the table if you do not consider other factors. Let me elaborate on a simple few of these:
In most cases, you are going to be selling a product into a niche market that already has a few players in it. Sure, your product will have a unique point of difference, but how do you price accordingly? It is important that you gauge your competitor’s products to unearth a gap in the market. This may not be a very obvious gap, however given you will be competing in a niche market, there should definitely be some sort of gap. For example, with my product, I realised that there were a lot of low end products and a hand full of premium products in the market. If I were to throw a few numbers at it to clarify, let’s say the low end products ranged in price from $20 to $35, and the premium products ranged from $59 to $80. There was very little that sat in that nice gap just under the high priced products. So rather than competing in the dog fight at the lower price point or competing against potentially established brands in the premium range, I decided to go with a value-for-money proposition and price in the lovely gap just under the premium products. There was very little competition in this gap. So running with the numbers I mentioned above, I would price the product somewhere between $45 and $55.
There are basically three ways you can go about proposing value to your customer. You can have a cheap product with little differentiation that creates demand due to price alone; You can offer a high quality, well differentiated product at a premium price, which generally creates less demand but offers a better profit margin and helps create a strong brand; Alternatively, you can offer a value for money proposition, where you have decent quality, differentiated product for sale at a medium price point, which sits between the other two options with regards to demand and profit margin but still allows you to build a strong brand. Either one of these can yield a lot of success. My advice is to stay away from competing with a cheap product on price alone. The only winner here is the customer who gets lower and lower prices as everyone undercuts each other to have the cheapest price. Both the premium and value-for-money proposition are better in the long term, particularly due to the additional benefit of creating Brand Value over time.
Launch and Reacting to the Market
Okay, so let’s say you’ve surveyed the market, decided on your value proposition and decided on a price range that you are comfortable with. When I say comfortable, I mean one that generates adequate profit to justify your venture. How do you know where exactly in this range you should price the product? Do you use a different price for the launch and once the product is established? In theory, if you have great patience and are going in with one of the two recommended value propositions mentioned above, it is best not to change your price point for the launch as it shows strength in the brand and product. That said, I did launch my product with a price point at the lower end of my range. This helped create a little bit more demand initially before I stepped the price back up toward the top of the range I had initially established. If you choose to start at the lower end of your range and step up, ensure you do not make many steps. Make 1 or 2 changes and do not change the price any quicker than 2 week intervals, or a month if you can help it. You may notice a dip in demand as you increase your price. This is price elasticity at play and it is expected. Check out this Price Elasticity Demand curve. It is fairly typical of how price changes influence demand. If you see sharp movements in demand, then maybe you are below the apex of the curve where small price changes greatly influences demand. If you find there is little movement in demand, you are probably above the apex of the curve where price increases do not diminish demand as much. You be the judge of which exact price point you want to settle on. Consider price and demand impact on your profitability in making this decision.
I’d tend to say do not do any discounting. Discounting is done so often these days that all it really does is devalue the product. It basically says to the customer that the discounted price is what the product is actually worth so just wait till I discount it again before you purchase it. If you wish to discount the product, do it with a goal/purpose in mind and ensure this is communicated well. If you wanted to run a festive season discount promotion, ensure you highlight that this is for the festive season only and it is special. I recommend that through the year, you keep discount campaigns down to one or two only. What you tend to see with discount campaigns is that your demand increases significantly during the discount period and then falls below your average demand straight after the discount promotion is finished, before finally resettling to normal levels. This is due to the discount campaign encouraging people to buy more during the discount and stock up or due to people seeing the brand as a discount brand. Overall, you may get the same amount of sales through the whole year but you made less profit because a large chunk of them happened at a discount. That said, discounts can be powerful if used sparingly and communicated well. I myself have not done any discounting except in order to get reviews, which is a whole other topic.
The main point I’d like to stress is that you need to think about all these factors when finding your price point. In most cases, if you’ve picked your niche well, you will find that you can charge a higher price than you had first anticipated. This will allow you to have the optimum value exchange with your customer; offer maximum value and extract maximum value. It’s a win-win situation.
Post Highlights for how to price your product
- Consider your costs and profitability
- Survey the market to find a pricing gap that you can exploit
- Be sure of your value proposition to the customer
- Do not change price unless you have to
- Avoid discounting as much as possible
- Everybody wins!