Undoubtedly, pricing an offering is one of the more important decisions that an entrepreneur makes, yet it is my observation that it seldom gets much thought. Pricing decisions are often emotionally based and made quickly, while prices are long lived (like it or not).
The market can dictate a price point or price range for a commodity product when it is offered by many competitors. If that is the case, you are kind of stuck with market prices unless your offering has unique characteristics or benefits.
Otherwise, there are some basic questions that you need to ask yourself about your product, the customer, and the selling environment before you establish the price:
1. What does the customer look like for the offering? What is the region or geography served? How many potential customers can be served? These simple questions will determine your channel of distribution costs.
2. How will you market the offering? Over the web? By mail? What are the costs of promotion and advertising? Similarly, your promotion mix will make a huge impact on your cost of sales.
3. Is price elasticity a factor? Does product demand change if you move prices up or down? OK, this sounds simple, but it can actually be vexing to many entrepreneurs. Lowering price does not always increase sales volume; it can be a hard lesson learned once you lower a price and get stuck with it.
4. What does your product really cost? This can be a really hard one for small firms since true cost accounting does not normally exist. Most small firms “estimate” cost and then apply a multiple of 3 or 4 to get a sales price. The problem exists in the word “estimate”, since it generally means “underestimate”. Most firms don’t capture or know all the true costs. This is a red flag waving.
5. Look outside the box. Are there any environmental factors that may impact pricing that are out of your control such as weather, legal or regulatory changes, or competitor misbehavior? They may be hard to forecast, but you need to be cognizant of the impact of these external factors.
6. Pricing goals. What do you hope to achieve with this offering and its price? Maybe you want to open a new market or drive out a competitor? Or, is the offering supposed to drive big profits; if so your product margins will need to be high and pricing defended.
With these issues researched or decided, the pricing begins. It still is a choice, but hopefully it is a more informed one.
John Bradley Jackson
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