Pricing New Offerings
If you don’t have competitors…
…how do you establish your price?
In the Washington University class I spoke of last week there were two entrepreneurs who said that they didn’t have any competitors. Their dilemma was that the lack of competitors didn’t give them a frame of reference in establishing their prices. My response? “You’re lucky.”
The natural tendency, especially when starting a business, is to look at competitors’ pricing and set the price slightly lower than the market. This strategy limits your revenue potential in two ways. Obviously lower prices mean lower revenues on each sale. Then there are the sales that are lost because buyers are leery of your offerings because the price is so low.
So how do you go about setting prices? One way is to look at what the normal profit margins are in the industry you’re joining, then add 15% to 20% to that margin. This approach has the advantage of being quick, but it doesn’t provide you with an effective way to justify that price to the marketplace.
It’s counter-intuitive, but if you want to get premium prices for your new offerings you have to be able to quantify and communicate the value to the market. Here’s a more effective approach.
Determine what it is that you’re selling – image, innovation or time savings. Then ascertain where on the spectrum your ideal customer fits.
For image, is your buyer a Walmart, JCPenney’s or Nordstrom buyer? JCPenney customers pay 3 to 4 times more than Walmart’s customers. Nordstrom’s prices are 12 to 14 times higher than Walmart’s.
For innovation, are they early adopters, dependability buyers or late adopters? Early adopters pay 3 to 4 times as much as dependability buyers and 12 to 13 times as much as late adopters.
With time savings we have to segment the group into two categories – retail customers and business customers. Retail customers use their time savings for recreation and they’re willing to pay 3 to 4 times their hourly compensation for recreation time.
For business customers time saving means increased productivity. If you know the typical profit margin for the industry you’re serving, the value of increased productivity is simply the additional revenues the company can generate without adding staff times their profit margin.
These simple guidelines not only make it easier to establish prices for your new offerings, but to justify those prices to your customers. Happy selling!
To get higher prices for your products/services, call Dale at 314-707-3771.
Tags: counter-intuitive pricing, Pricing, pricing for profit, pricing management, pricing strategies, pricing strategy, value pricing, value-based pricing
