The most often asked questions I get have to do with product pricing. Yes, each case is different, but I can summarize the most common issues with these six tips:
1. Most Companies Set Their Prices Too Low
One lesson I learned over they years is that you can always get more for a product than your gut tells you is possible. Most people price by looking at the competition and playing follow the leader. Sure, competitive pricing is a good thing, but letting your competitors tell you what your product is worth, is not. Checking competitive pricing is necessary, but it is only one step in a process of looking at your costs, your margin needs, and the value your product brings to the buyer. Yes Virginia, it is possible to get a higher price than your competition. You have to be able to answer a prospect's question, however, when they ask why your product is worth the asking price. Remember, the answer can be a differentiated product, but it can also be post sale service, warranty, commercial terms, business stability, or a host of other reasons. Bottom line, if you can answer that prospect's question, don't be afraid to charge a higher price. If you can't answer the question, you have a different problem that you need to work on.
2. You Just Take Your Cost and Mark It Up? Really?
Ouch. OK, you never have to worry about someone in accounting asking you why your margins are so low. You do have to worry being asked about the lack of sales. Look, I know this is the easy way to do pricing, but it doesn't work. You need to understand what the market is willing to pay for similar products, and then set a target price. You decide what kind of margin you would like to have, and then investigate if you can make or buy the product at a cost that will allow you to hit the targets. Discover competitive price, adjust for your added value, figure out desired margin, and then set a target cost. If you can't find a way to hit that target, save yourself some effort and kill the product before you start.
3. What if there is no competition?
There is always competition, even for a new concept product. Yes, you may not be able to find a direct competitor for your new widget. When the first security camera was invented, the competition was a security guard. Look at the user's other choices including the cost of doing nothing.
4. Look at your channel's margin; not just yours
This is one of the most common start up mistakes. The neophyte error is to invent a new product and then assume you are selling direct to the end user and set your pricing accordingly. Of course, pretty soon, you realize you need a channel but you have now established a market price and you have no margin to give to a distributor or dealer. This is a tough mistake to recover from and it is often "game over" for the product. Always set your pricing assuming a professional sales channel. If that seems to over price the product, you likely have a product cost problem.
Even if you don't make the mistake of overlooking the channel entirely, many companies make the mistake of trying to set their pricing based on a competitor's price to distribution. The right answer is to start with an expected street price to the end-user and then calculating the margin the channel needs to be happy. Make sure the distributor / dealer can sell it to their customers at a reasonable price if you want sales to grow. Don't bother getting mad that the channel makes more than the manufacturer does. No channel, no sales.
5. Look at all of your costs
If you are buying the product from someone else, always develop a "burdened" cost and use that to do all of your pricing calculations. The burdened price should include an allowance for the cost of purchasing, duty and import costs, freight, etc. You can make it simple by coming up with a fixed percentage that you add to your purchase cost to arrive at the burdened cost. It is important to add these very real costs into the numbers before you start making pricing decisions.
6. Your Sales Force Will Always Tell You The Price is Too High
Even if you buy $100 dollar products and sell them for $50, someone will come running into your office and tell you that they just lost a job because the price was too high. It's the nature of the beast. This happens for two reasons: first, the customer had another reason to buy from someone else, but it was easier to blame it on price. While it may not be the Sales Force's fault, your product message did not get through and you were outsold. Second, and perhaps more troubling, the guy running into your office has yet to be convinced that your product is worth what you are asking for it. All prices need to have a story attached or this problem will never get solved.
