You must know and understand the four dimensions of pricing for a new product or start up:
Cost drives a lot of pricing decisions, but for the wrong reasons. A typical price strategy is to mark up the estimated cost by some multiple like 3 or 4 times. The problem with this approach is that most small firms have poor or nonexistent cost accounting. Note the word “estimate”; it invariably really means “underestimate”. Enough said.
Your customers have prices in their heads—they can be high or low. These price expectations are the result of past experiences, research, or plain guesswork. In effect, the buyer sets the expectations of the price ceiling or maximum price that is acceptable. This ceiling can be raised when the customer recognizes the product’s potential value.
Meanwhile, your competition is also influencing price by their quotations, advertisements, and past pricing. In a commodity product environment, these activities can have a significant impact on the price that you might offer. For a new product or start up, the competition’s price may be of little or no consequence.
Finally, your personal expectations of price may be the biggest influence in determining price. Your past experience, product knowledge, desires, and fears can help or hinder your pricing strategy. My experience is that these personal influences invariably cause you to lower the price; fear seems to trump everything else.
Know the four pricing dimensions, but recognize that value should drive your pricing strategy.
John Bradley Jackson
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