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Pricing

Setting the price of your product or service takes a lot of consideration. Price it too high and the potential customer may not take the risk. Set the price low and the product might not be taken seriously.

It is important that the price you fix allows for sufficient profit and considers the following costs:

Variable Costs - The cost of materials and your time.
Fixed Costs - include: wages, rent, heating/lighting, promotion, telephone, postage, stationary, insurance, repairs, transport, loan repayments, professional fees and charges that do not change regardless of what you sell.

Once these costs have been identified you can calculate what price to put on your product or service. Price is probably the most important influence on consumer buying. You must ask yourself, what are people prepared to pay for my product or service?

Often the only way to find out is to launch the product and see what happens. You might introduce the product through direct mail were you could split the mailing list and offer the product at different prices. The results could be valuable and influence the final pricing strategy.

Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies. However there are other important approaches to pricing.

psychological pricing
This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example 'price point perspective' - ninety-nine pence not one pound.

product line pricing
Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be £2, wash and wax £4, and the whole package £5.

optional product pricing
Companies will attempt to increase the amount ofcustomer spend once they start to buy. Optional 'extras' increase the overall price of the product or service.
For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.

captive product pricing
Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades that fit the razor.

product bundle pricing
Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach.

promotional pricing
Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).

geographical pricing
Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.

value pricing
This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.

Your prices should reflect how well you know your customers. Investors are used to seeing and often rejecting business plans in which an entrepreneur states the product or service will be higher in quality and lower in price than the competition. Costs tend to be underestimated so if you start with low prices you leave little room for manoeuvre, and price hikes will be difficult to implement.

If you charge more than the competition you will need to justify the higher prices on the basis of newness, quality, warranty and/or service. If you charge lower you must explain how you will maintain profitability. This may occur through more efficient manufacturing and distribution, lower labour costs, lower overheads or lower material costs.