What Price Success?

Your prices can ensure your prosperity or doom you to failure. Choose them wisely.

You've got the product or service that's going to put you on the map. But before you rev up the machinery to produce this potential winner, you have to complete a task that's as important as making the product itself: putting a price tag on it.

Just how important is selecting the right price? It could mean the difference between success and failure, says John Mullins, a former entrepreneur and now an associate professor of marketing at the University of Denver. "The wrong price can put you out of business fast," he says.

The trick is coming up with a price that returns good profits and attracts customers at the same time. Finding that magic number requires careful thought and planning.

Gut Instinct

Claudio Rayes, president of Claudio Rayes Inc., a High Point, North Carolina, designer of sculptured iron furniture, agonized over the price of his products. Rayes, 42, who started his business 20 years ago in Argentina and then moved it to the United States in 1997, wasn't creating ordinary, mass-produced furniture to be sold in discount department stores. His elegant, upscale pieces were intended to be sold in exclusive furniture stores and high-end department stores.

"My [furniture is] time-consuming to design and expensive to make," says Rayes. "To make a fair profit, I have to charge more than [I would for conventional furniture]."

Afraid a premium price tag would scare people off, Rayes almost made the fatal error of pricing his products too low. Although he knew little about marketing techniques, he went with his gut and settled on an average price of $1,500.

"I figured the customers I was trying to reach would associate the price with the true value of the product," Rayes explains. "So I tested the price and quickly saw customers didn't question it. If I charged less, I think it would hurt the image of my product."

He was right, according to Timothy Stearns, a professor of entrepreneurship at California State University, Fresno. A ridiculously high price can kill a product, but so can a very low price, he says. The well-heeled customers Rayes was going after would most likely have been turned off by a low price.

"The price of a product tells consumers what kind of value and quality to expect before they even buy it," Stearns explains. For example, customers who can afford it don't think twice about plunking down an eye-popping amount of money for a Mercedes, Porsche or Jaguar because they associate extraordinary quality and value with the prices of these cars. "In a consumer's mind, a higher price often connotes high quality," he says. "Conversely, a low price means poor quality."

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This article was originally published in the March 1999 print edition of Entrepreneur with the headline: What Price Success?.

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