Product Pricing

1. Define Your End Consumer Profile

Before determining your product’s price, it is crucial to identify the target consumer profile. Understanding their needs and behaviours helps position your product effectively in the market. Consumers generally fall into four categories:

1. Low-cost market:
   • Products in this category are affordable but often of lower quality.
   • Examples include generic, mass-produced items designed to meet basic needs.
2. Value-for-money market:
   • These consumers seek high-quality products at reasonable prices.
   • For instance, many supermarket home brands offer excellent quality at competitive prices to attract budget-conscious yet quality-aware shoppers.
3. Opportunistic market:
   • Products in this market are priced high despite offering average quality.
   • For example, food items in event venues like sports arenas are often sold at a premium.
4. Premium market:
   • High-quality products with high prices dominate this market.
   • Examples include luxury cars, fine dining, or high-end electronics that cater to consumers who prioritise quality and exclusivity.

2. Calculate the Cost of Goods Sold (COGS)

Accurate costing is essential to determine a sustainable price for your product. COGS includes all expenses incurred in producing and delivering your product.

Example: Barber Shop Costing

A barber calculates the cost per customer as follows:

• Cloth cost:
  • Purchase price: AUD 100
  • Used 1,000 times
  • Cost per use: AUD 0.10
• Chair cost:
  • Purchase price: AUD 5,000
  • Used 10,000 times
  • Cost per use: AUD 0.50
• Scissor cost:
  • Purchase price: AUD 100
  • Used 1,000 times
  • Cost per use: AUD 0.10

By including additional costs such as rent, employee wages, and utilities, the barber determines a total cost of AUD 35 per customer. He then sets a price of AUD 50 to attract new customers and plans to adjust pricing based on demand.

3. Quantify Value Creation

When pricing your product, focus on the value it provides to your customers rather than solely on production costs. Value creation can be quantified by assessing the tangible benefits your product delivers.

Example: A business technology provider calculates that its software saves a client AUD 50,000 annually in operational costs. The provider then prices the software at AUD 10,000 per year, ensuring an 80% benefit for the client while retaining 20% as profit.

Value considerations include:

• Increased customer productivity
• Improved employee satisfaction
• Enhanced branding and market share
• Greater profitability

Why Keep Costs Confidential?

• Customers: Revealing costs may lead to bargaining and reduced margins.
• Employees: Knowledge of costs, especially by sales staff, might lead to underpricing and lower profit.

4. Identify Decision-Making Units

Understanding your customer’s decision-making hierarchy is vital to pricing. Focus on the key decision-makers and influencers to streamline sales and secure favourable pricing.

Steps to Follow:

1. Identify the person with veto power who can approve decisions, such as senior executives or directors.
2. Engage with primary and secondary influencers who advise decision-makers.
3. Maintain alignment with compliance officers for smooth processes.

Example: A cookware brand effectively targets households by appealing directly to the person managing purchases, ensuring their products are perceived as must-haves.

5. Assess Market Options

Evaluate the availability of alternatives for your customers. If your product offers unique features or unmatched value, you can command a higher price. Conversely, in a competitive market, pricing must reflect customer expectations.

Strategies:

• Reduce comparable options for customers by highlighting unique selling points.
• Leverage first-mover advantage to set premium pricing.

6. Align Pricing with Product Life Cycle

Your product’s stage in its life cycle influences its pricing strategy.

Early Stage:

• Products introduced early often appeal to tech enthusiasts and early adopters willing to pay premium prices.
• Example: A cutting-edge gadget priced at double the competition due to its novelty.

Matured Stage:

• Once competitors enter the market, pricing stabilises, requiring offers like bundled deals or extended warranties to maintain competitiveness.

Decline Stage:

• Gradual price reductions attract price-sensitive customers and clear inventory.

7. Strategic Price Adjustments

Setting high initial prices enables you to target early adopters and adjust downward later to attract broader customer bases. Starting with low prices makes it challenging to increase them over time.

Example: A premium smartphone brand launches its flagship model at a high price. As newer models are released, older versions become more affordable, appealing to a different demographic.

Key Takeaways

• Understand your target consumer profile.
• Accurately calculate the cost of goods sold.
• Focus on the value provided to customers rather than production costs.
• Identify key decision-makers and their influencers.
• Analyse market competition to position your product effectively.
• Tailor pricing to your product’s life cycle.
• Start with higher prices and reduce them strategically over time.

By considering these factors, businesses can develop a robust pricing strategy that balances profitability with customer satisfaction.