Secrets to Pricing Your Product
There's no such thing as the perfect price. If figuring out what to charge customers leaves you baffled, try these three tricks.
Unfortunately, there is no such thing as the perfect price.There is that mythical price that gives the customer excellent bangfor his buck and the company excellent profits for its efforts, buteven that price point can't be considered the perfect price.That's called compromise, not perfection.
Pricing is an important aspect of every business because priceis used to create financial projections, establish a break-evenpoint, and calculate profit and loss. Though price may bedetermined by any number of factors, basically there are three waysto establish the price for your product:
1. Perform a comparative analysis on similar products sold bycompetitors. Are the features and benefits similar to yourproduct's? If so, use the price of the competing product as apossible price point for your product. If your product is ofsuperior quality, features and benefits, then you might be able tojustify a higher price and still be competitive. If your product isinferior, then your price point will be less.
2. Calculate the total cost to produce and deliver yourproduct. Use this amount to figure in an acceptable margin ofprofit to calculate the final price.
3. Use what I call "The David CopperfieldMethod." Named after the famous magician who made theStatue of Liberty disappear on national TV, this method of pricingsimply means that you pull the price out of thin air. Believe it ornot, many companies use this method to establish pricing. It'salso the reason many companies disappear.
It's easier to understand the allure of the CopperfieldMethod when you realize that more often than not, product pricingcomes down to one thing: perception.
Perception-or, as it is more commonly referred to in business,perceived value-is one factor most entrepreneurs use to determineproduct pricing. After all, our products are our children. Wecreate them, nurture them, grow them and love them. And often weperceive their value to be much greater than the market perceivesit to be.
It's all about the perception of value. What makes a $10,000Rolex watch more valuable than a $10 Timex? Functionally, both arewatches and both perform the exact same function: They tell time.Why then does one sell for a thousand times more than the other?The answer is because it has perceived value.
An expensive wristwatch cannot make you better-looking, smarter,healthier or more popular with the opposite sex. But the perceptionis that if you have a Rolex on your arm, you must have somethinggoing for you that the wearer of a $10 Timex does not.
Establishing a good price point from the beginning is vital,because it's much easier to lower prices than to raise them. Ifyou introduce a product at $100 and make no sales, you can easilylower the price to $75 without attracting much attention. However,if you introduce the product at $75 and it proves popular, and yousubsequently raise the price to $100, you may face irate customersand even be accused of price-gouging. So it's better to starthigh and adjust down, if needed.
There really is no rule of thumb when it comes to raisingprices. Prices are never set in stone, and consumers expect them tochange with the times. You might raise prices to cover an increasein the cost of manufacturing and other production costs, or inresponse to market demand (the greater the demand, the higher theprice).
You can also justify a price increase when you improve aproduct's quality, features and benefits. The buying public isgenerally price-conscious, but if you can show that the value ofyour product has increased by the addition of new features andbenefits, then the public will usually not balk at an increase inprice. Keep in mind that price increases should be done in smallincrements over time, not by significant amounts overnight.
Tim W. Knox is the founder, president and CEO of threesuccessful technology companies: B2Secure Inc., a Web-based hiring managementsoftware company; Digital Graphiti Inc., a software development company;and DropshipWholesale.net, an online organizationdedicated to helping entrepreneurs launch and prosper from theirown eBay or online sales business.
The opinions expressed in this column arethose of the author, not of Entrepreneur.com. All answers areintended to be general in nature, without regard to specificgeographical areas or circumstances, and should only be relied uponafter consulting an appropriate expert, such as an attorney oraccountant.