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How to Price Your Product – Part 1
Market Pricing
Many inventors have a hard time pricing their product. Why is this? It is because pricing your product is a very difficult task—one that takes weighing multiple factors. The two main aspects you need to weigh are cost and market factors. We will deal with pricing in a three part series, with the first part dealing with market pricing, the second part dealing with cost pricing and then the third part dealing with how to balance the two.
Market pricing is often favored by many companies, and although this can have disastrous consequences, which we will talk about in our third article, this is also a way to maximize your profits.
So what is market pricing? Market pricing is a price based on market factors, for instance, what customers will pay or what is the minimum or maximum price based on the distribution channel’s image. Most often, market pricing deals with what customers will pay for your product.
Different customers of course will have a different value for your product. For instance, some people pay a large sum of money to buy a condominium or loft in a downtown district while other people prefer to have a large house in the suburbs. This is because they value the housing differently. Those who prefer downtown like the convenience, lifestyle and image of living downtown, while the people who prefer the suburbs might value privacy, having more space and not mind commuting. These are different value judgments and the people who prefer to live downtown might look at the prices for houses in the suburbs and think that they are much too high for the location and the people who live in the suburbs will look at the prices downtown and say that they are much too high for the space. It is important to understand how different customers will value your product if you want have the price that allows you to make the most money.
Before you can start determining your price, you need to find out who values your product the most, meaning, who will pay the most for your product. You need to base your product price based on this group of people. For instance, using the above examples, if you were building new condominiums downtown, you would want to find the price that the people who want to live downtown would pay, not the people who prefer living in the suburbs.
Once you have determined which group will pay the most money for your product, you will need to have focus groups with people from this customer population. Never ask anyone how much they think your product is worth. They will always list a price lower than they are actually willing to pay. You need to take a variety of products that are similar to yours that have a range of prices. Without listing the prices, have your focus group rank the products listed in order of value to them. So they could rank the product they think has the most value first and so on down the line. Then look at where your product falls in the list. If your product falls below products that cost $50+ and above products that cost $40- then your price should be in the $45 range. It probably won’t be so simple, but you need to use the prices as existing products as a guide.
Once you have a pretty good guess from the focus group about what your price should be, you need to have some limited test runs. If your product lends itself to being sold at fairs or shows, you should try that. Or you can try limited retail runs or anything that gives your product a test with real buyers. Then you need to try different prices for your product. The goal is to see how well your product sells at different prices. At lower prices, of course, you will sell more products, but your goal isn’t to sell the most products, but rather to make the most money.
You will also find that after a certain price the number of people buying will sharply drop off, this is because your price is too high.
Let’s look at an example to see how this works.
You have a product that costs $5.00 to make. You have arranged to sell at 3 trade shows for 2 days each. Each day you will have a different price to see how each price sells.
Day 1 – Price: $20.00 – Products sold: 1,000 – Profit: $15,000
Day 2 – Price: $22.00 – Products sold: 975 – Profit: $16,575
Day 3 – Price: $24.00 – Products sold: 925 – Profit: $17,575
Day 4 – Price: $26.00 – Products sold: 850 – Profit: $17,850
Day 5 – Price: $28.00 – Products sold: 800 – Profit: $18,400
Day 6 – Price: $30.00 – Products sold: 400 – Profit: $10,000
So in the above example, we see that $28.00 is the best price for that product, even though you sell 200 fewer products than when the price was $20.00, you made $2,400 more. There may be factors that make your trials less clear, like attending different types of shows or fairs or having a busy or slow retail location. You need to try to make your trials as equal as possible, but if this is not possible, you will need to adjust. For instance if you go to a big show one weekend and then a small show next weekend, you will need to adjust your results based on the difference. Again, this will help you determine what price best reflects the value of your product and what price will bring in the most money. It is highly unlikely that your results will be so easy to interpret, but by using test runs, you will have a much better chance of choosing the right price based on the market.
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