Pricing: are you sure you’ve got the right price?
Setting the price for a product or service correctly is vital for companies to generate the highest possible revenue. Decreasing prices may lead to increased unit sales, but may not optimise revenue and may damage brand and long term profitability.
In the B2C market, where unit sales are far higher, it is easier to measure the impact of price changes on volume throughputs. A topical example of this is how Amazon is using penetration pricing for its Kindle e-reader. It currently retails at $139 (nearly half the price it was selling for just five weeks ago). This price cut is a real investment for Amazon, who said last year that its Kindle manufacturing costs were “significantly higher” than the estimated $185.49, meaning the company is losing money on each unit sold. The rationale behind this aggressive new price is to entice more people to take the e-reading plunge and to compete against Barnes & Noble’s Nook and the Apple iPad (which offers far more functions than simply e-reading).
Pricing in the B2B market is harder to judge. On a couple of occasions over the last year, I have witnessed clients who have been pricing significantly beneath the market average and in one instance, the company had a market leading product. If rational buyers believe “you get what you pay for” then charging too little both deters and confuses potential customers.
So what is the right price for your product?
All pricing is relative. As part of the competitor analysis that we conduct for clients, we build pricing trees which allow the relative price differences to be easily seen and compared (see left). This, coupled with a detailed feature and benefit analysis, helps you to understand how your product compares with other market offerings. The output of this analysis allows you to price according to the value you deliver to customers. As a result of this sort of work, one client discovered that they had the best product on the market, but weren’t charging accordingly.
Neglecting competitor pricing can give you tunnel vision. Having detailed information about your products and services, understanding how these compare to the competition and what the positioning strategy is for your company, will help turn pricing into more of a science than an art!
If you would like to talk to us about your pricing strategy, give us a call or email us.
An example of a Milner pricing tree, showing competitor pricing:
