by Lisa Genovese, President at BottomLine
How do you determine the price of a product or service? Regardless of size or industry, pricing is influenced by more factors than just what the customer is willing to pay.
When a random number becomes a price, it is very possible that a product or service isn’t making the most amount of money that it should be generating. On the other hand, if a price begins with market research and testing, a business can then have a clear picture of what number will result in a sustainable, profitable business.
AN EDUCATED GUESS ISN’T ENOUGH
Bringing a product to market requires a close look at pricing competitively for the market. Unfortunately, many business owners have a tendency to cut a few corners at the pricing stage, taking educated guesses with the knowledge of pricing up or basing price simply on your supply costs.
You may never really know if the business is actually making a profit or if your pricing is way higher than what the market will tolerate. Price matters – especially the wrong one. Mispricing can cause a break in brand trust and brand attachment, ultimately causing your customers to think twice about the business and what it offers. So, how do you translate what you know about your product and market into a solid pricing strategy?
THE FORMULA: WHAT MAKES A PRICE STRATEGIC?
1. Competitive Research
Solid competitive research helps a business understand each product’s unique selling proposition (UVP), price, and how the product is superior or different (personally, I like to see it in a chart matrix in a spreadsheet so it’s easy to see discrepancies at a glance).
In this phase, it’s particularly helpful to see customer needs and weigh those needs against the competitor’s UVP. This extra step makes sure that the new product actually aligns with customer’s pain points found with competing products.
Based on the above, form a hypothesis on what you feel the price should be for the product based on the research you conducted in the first step.
As a rule of thumb: A 10% price increase typically isn’t noticed at all and is “playing it safe”, a 20% increase is noticed, and a 30% price increase is noticed a lot. Of course, as with any Rule of Thumb, there are exceptions.
In fact, you’ve likely purchased an exception. If a product is revolutionary I’ve seen a 100% increase if warranted and if the market can handle it. The highly coveted Dyson Airwrap styler is a good example of this.
It’s also at this stage that a business should take perceived value into account. Value is created when a product or service does one of the following for the customer: “Make me look good”, “save me time”, “save me money”, or “make my life easier”. Where does your product or service deliver and how well? If the perceived value is higher, a price increase of 20-30% would be understandable.
With a pricing hypothesis, it’s time to validate it with primary research. This includes interviews and focus groups.
4. Set & Test
Set the price of the product or service, and test the market with a small sample size.
With confidence in the initial price and a finger on the pulse of the market, you will be able to adjust prices if there is a major pushback in the market. The best prices are tested once they’re live.
THE FINAL WORD
A business with a pricing strategy is a business that is proactive and forward-thinking. When a business does its homework, pricing is no longer a dreaded step in business – instead, it’s a tool in your business that can enhance how much you sell and act as a foundation for a business that is prosperous and sustainable.
If you’re completely intimidated by pricing or you simply want to make sure that your pricing strategy is grounded in market research, let’s talk. Contact me for a complimentary brainstorming session on market research or pricing.
Please note: This article contains the sole views and opinions of Lisa Genovese and does not reflect the views or opinions of Guidepoint Global, LLC (“Guidepoint”). Guidepoint is not a registered investment adviser and cannot transact business as an investment adviser or give investment advice. The information provided in this article is not intended to constitute investment advice, nor is it intended as an offer or solicitation of an offer or a recommendation to buy, hold or sell any security. Any use of this article without the express written consent of Guidepoint and Lisa Genovese is prohibited.