10 Questions to Ask When Pricing Your Product
Great products and services don't guarantee success. You also have to price them correctly. That requires knowing your customers well and what they're willing to pay, as well as what your competitors are charging. You also might consider market segmentation, product bundling, and both the tangible and intangible benefits you're selling.
We spoke to four experts and came up with 10 of the most important questions to ask when putting a price sticker on your product. Here's what they had to say:
What is the customer willing to pay for my product?
If a product costs a dollar to make, many companies assume they should charge $2 for it. "That's what you call cost-plus pricing. Many companies do this, but it's not optimal," says Mark Stiving, author of Impact Pricing: Your Blueprint for Driving Profits (CWL Publishing Enterprises, 2011). "Pricing should only be based on what the customer is willing to pay. If the customer is willing to pay $1,000 for a product that costs you $10 or even $100 to make, you have a successful product. If the customer is willing to pay $1,000 for something that costs $1,000 to make, you don't raise your price -- you get out of that business." To help determine what a customer is willing to pay, you can conduct market surveys and focus groups.
What kind of customer do I want to target?
If you target customers who value your product the most and charge a high price, you'll be making more money per sale but limit the size of your market. If you target the mass market with a lower-priced product, you'll be making less per transaction but selling a lot more units. The ideal situation is to cut the market into segments with different price points, Stiving says.
How should I react to my competitor's prices?
In pricing strategy, there are three important questions: Who provides an alternative to my product? Is mine better or worse? And does the customer care? That's the view of Tim J. Smith, managing principal of Chicago-based strategic pricing firm Wiglaf Pricing. If your product is better, find the competitive price difference and price upward. If yours isn't as good, find the competitive price difference and price downward. And as your competitors' prices change, so should yours. But this strategy applies only when customers are very familiar with prices, he says, using tennis balls and tennis rackets as an example: "Stores advertise lower tennis ball prices to get people in because people are very aware of what tennis balls cost. But they can charge higher prices for tennis rackets because there is not this same type of awareness."
Can I offer different levels of products or services at different price points?
It's always better to give customers a choice, says Jean-Manuel Izaret, a partner with Boston Consulting Group, a management-consulting firm, who is based in San Francisco. Izaret suggests offering at least three price levels on any product: basic, upgraded and premium. He notes that Apple entered the market with 16, 32 and 64-gigabyte laptops "If they only offered the 16 gigabyte, they would have sold a lot but would have missed out on the 64 gig customer willing to pay more to buy the best of the best. Or if they were only at the high end, they would miss out on the bulk of the market."
How can I adjust my prices?
Companies can often achieve a 1 percent to 7 percent margin improvement by adjusting prices to fit specific consumers, Smith says. "Different customers have a different willingness to pay, and even the same customer will vary in their willingness to pay based upon the purchasing occasion." To determine for whom and when to adjust prices, you can observe customer buying habits and do consumer research through interviews and focus groups.
Have I given the customer a reason to pay more for my product?
If Del Monte green beans sell for $1.49 and the store brand goes for $1.29, "it's Del Monte's job to make sure the customer understands the difference and values that difference," Stiving says. There are real differences in products, and then there are perceived differences. Real differentiation comes in product development; perceived differentiation in marketing and sales. "Ideally, you've created real differentiation and communicated it to the customer so it becomes perceived as well," Stiving says. "In Del Monte's case, they add real differentiation through strict quality-control measures, and perceived differentiation by advertising quality to their customers."
Can I base my price partly on intangible benefits?
Many businesses base price strictly on the product or service itself, but some companies might be better off tying their price to the intangible benefits they deliver to customers. Take a lawn service, for example. "If you tell your customer you have the most modern mower with the sharpest blade, that's not going to mean anything to them," says Matt Johnson, a pricing strategy expert with the San Francisco office of Simon-Kucher & Partners, a global consulting firm specializing in strategy, marketing, pricing and sales. "But if you show them you're freeing up two to three hours of their time on the weekend and allowing them to impress the neighbors that might mean a lot more." He notes that even candy bars can be priced and marketed based on more than just the ingredients: "With Hershey's, you're getting a great chocolate bar, but [higher-priced] Godiva is selling love and a means of pampering yourself."
Should I bundle my products for a single price?
If possible, use pricing to get your customer to buy several products rather than just one, Izaret says. He points to McDonalds and how successful the franchise has been at bundling fries and a drink with a burger. There's also Microsoft, which has bundled Excel, Word and Outlook into one product -- Microsoft Office. "By attaching to the main sale you made, you're giving up a little bit on each product, but they're buying all three, so it's a good deal for both seller and buyer," Stiving says.
Should I discount to get people to buy my product?
Promotions are fine from time to time, but the full price should remain the standard. If you regularly have to discount to sell your product, you've either overstocked the product with features that people don't want to pay for or you're trying to sell it to the wrong type of customer, Johnson says. And once people start paying a lower price, it's tough to raise it back to the level you need to make a good profit. "If the product has 10 features, but the customer only cares about three of them, that can backfire because people feel they're buying a lot of stuff they don't need," Johnson says.
How does the customer want to buy my product or service?
Is it something I should sell for a one-time fee? On an annual basis? On a monthly basis? There's no answer that fits all situations. But what's important is that you "create a model that fits with how people want to buy your product," Johnson says. He worked on such a pricing issue with a healthcare organization that was partnering with a gym on a fitness program. When the healthcare workers were charged $99 a year for an hour a week of personal training, customers went the first few months but then their usage tended to trail off. "When it came time to renew, they had not been to the gym for weeks, and they didn't think it was worth plunking down that big amount again," Johnson says. The gym changed its pricing to a small monthly fee, with emails reminding people to take advantage of the offer. The result: People tended to go more frequently and over longer periods of time. "This was a better system because people never had to make that $100 decision to buy it," Johnson says. "You want to pay attention not just to how easy it is to get the sale on the front end, but how easy it is to renew."