How to set your pricing
So how do you know when the price of your product is right? Pavlo spoke about what you need to consider when pricing your product and provides a number of strategies that may be appropriate. Listen to the full show here.
It's easy to find yourself considering hiking the price of your product, especially when you think you're the only supplier in your market.
Just recently the healthcare market exploded in fury over the massive price increases of EpiPen, a lifesaving antidote to lethal allergic reactions to things like nuts and bee stings. It operates through a device that delivers an emergency shot of epinephrine in to the victim and saves their life. The manufacturer has increased its price 600% since 2007. The alarming part is the product is only insurance, you'll die if you don't have it if you're allergic to bees for example and get stung but you may not be stung. It only lasts 12 months and then needs to be replaced. They tried to quell the market by offering an identical generic at half the price. The CEO earns $19m, up $9m from 2013! They chase profit regardless of the outrage caused by this.
So what should you consider when setting your price:
- The cost of the product or service
- The fixed costs of operating your business eg. rent
- Your competitors' cost, regardless of how your unique offering
- Customers' perception on value (something that the makers of EpiPen didn't consider)
- There are a couple of strategies to look at your price
1. Pricing at a premium
This means you price higher than their competitors. This is easier in the early days of a product's life cycle when your product is unique BUT it's important to work hard to create a value perception. This can be done through packaging, branding, the apperance of a product. The recent phenomon of craft beers or artisanal foods are a good example of this. People who want to be perceived as trendy and fashionable pay a premium for them.
2. Pricing for Market Penetration
You can attract buyers by offering lower prices on goods and services, but it's very hard to then increase your prices as you can't take away something that I once had. For this you need to acquire customers then increase value through bundling and value adds.
3. Economy Pricing
This is different to to market penetration. Kulula were a good example of this. They offered no frills flying and are even now perceived to be a low cost provider. This can be a difficult one and dangerous as you need volume to be able to carry on doing this.
4. Psychology Pricing
Understand your customer by considering your customer and making their decisions easier.
- Limit price choices for similar products so customers can make simpler decisions can increase sales by 76%.
- Anchor your price by putting two products next to each other that are different but the same. For example, two watches next to eachother with a R5,000 price difference. It creates a clear sense of value, making decisions easier.
- Never increase prices by more than 10%. Anything above that makes customers doubtful and they question whether they need it.
- Reduce pain points – customers spend until it hurts. Avoiding pain through:
- Reframing value eg. A couch priced at R5,000 vs R222 per month for 36 months
- Creating a bundle eg. Buy the laptop, mouse, bag and software separately for R6,000, R300, R650 and R3000 respectively but the whole package for only R9000.
- Pricing supported by messaging that has utility to it. eg. Can be used for hot or cold dishes
- Lead the mind eg. for the small fee of R70 .. Versus for only R70
- End with 9 – research shows that an item selling for R39 outperform sales of a similar product for R36