Many entrepreneurs and small business owners struggle with establishing a good pricing strategy for their new products. Some approach this task the way an accountant might recommend. For instance, in a perfect world, you would count up all your costs to make the product and then simply add a markup for profit to get a price (this would be a cost plus pricing strategy). However, your customers don’t really care how much it costs you to make the product and they certainly would rather have a lower price than giving you lots of profit. Also, if your competitor has a lower cost structure, i.e., they can make the product for less than you, then they will be able to charge a lower price.
So how do you create a pricing strategy for your new product or service? You try to figure out what your prospective customers, or the market, are willing to pay. For established markets, like commodities and consumer electronics, the prices are fairly well established. Consider the price of microwaveable frozen vegetables in your local grocery store. The pricing for those items is very well established and ranges around one to two dollars for a 12 ounce bag. If you were to see a bag of frozen vegetables that was eight or nine dollars, it would seem to be over-priced and it’s unlikely you would buy it.
Staying with frozen vegetables. If the price range for a 12 ounce bag is one to two dollars, that’s a pretty big difference in percentage terms. Why does it cost twice as much for one brand over another? Usually the store brand will be priced nearer to one dollar and the brand name version, like Birdseye, will be priced closer to two dollars. Are brand name vegetables really twice as good as the store brand? do they come from better farms? grown in better soil? have more vitamins? spend more on advertising? Whatever the case, the brand name version has been able to differentiate itself enough to convince customers that its value is significantly greater than the store brand.
Establishing a pricing strategy for your new product requires a 3 step process.
Step 1. Determine what the price range is in the market today. Visit websites and stores that sell a similar type of product and write down the price points. Also see if you can determine what differentiates one product from another, and one price point from another. For food it might be the ingredients, for electronics it might be the features, and so on ….
Step 2. Figure out where your product fits in relation to the other products and prices in the market that you determined in Step 1. For example in the grid below, Product B has the most features and the highest price. If your product fits in between Product B and Product C from a feature comparison, then you would price it accordingly someplace between the prices Product B and Product C.
Step 3. Try and sell your product at the price you set and collect feedback. If people genuinely like your product but tell you the price is too high, then consider adjusting it. However, you want to be very careful when lowering prices because it will be much more difficult to raise them later on. If people aren’t really interested in your product, regardless of the price, then you have a much more serious problem and will have revisit whether you have a viable business idea.