How do you price your product to maximise returns?
Often companies will view pricing from an internal perspective, that is price is based on the cost to produce plus a reasonable margin to cover overheads and a profit margin.
The other common pricing approach is to align it to competitors prices.
The first approach is internal looking, the other is industry focused, but are they “customer” focused. From a customer perspective, price is the value they place on a particular product or service – this is known as market pricing.
Often we miss opportunities to increase margins by focusing on the first two and not evaluating what a product is worth to a client while still taking into account competitor offers.
I’ll give you an example, some years ago I was responsible for commercialising a range of engineering products and services. To ensure the highest return, I focused on products that had the following attributes:
- Unique and differentiated
- Low levels of competition for similar products that delivered the same outcome
- High demand for the solution it delivered
- Easy market entry with minimal investment required.
There was one product in particular that met this criteria and only one competing product in the USA which was a main market we were targeting. After reviewing pricing and features on the competing product and sourcing a distributor for the USA, I brought the engineer who invented the product for a meeting to outline our marketing approach.
I told him the margin would be 500%. This visibly upset him as the industry average was 20%. No matter how much I reiterated the logic behind the price, he would not accept it.
I finally used an analogy to prove my point. I pushed the glass of water in front of me into the middle of the table and said “If you were in desert for 3 days with no water, what would the glass of water be worth to you?” He had a stunned look and I responded ”You would give me all your money, your car, your house and probably even your wife” He nodded “yes”.
I then explained this is what the USA market was like for our product. They really needed it and there was only one alternative product and it was even more expensive. The price was linked to demand in a specific market and what they would be willing to pay rather than what it cost to produce.
This is easily illustrated in the pharmaceutical industry where life saving drugs often have a 3000% mark up on production costs. What is someone’s life worth to themselves? A lot!
So a simple approach to pricing is:
- What is the customers need or problem that this product will satisfy?
- Are the products on the market highly differentiated?
- What is it worth to the customer?
- What will it cost to produce versus the price you can charge?
Of course other areas such as distribution, promotion, risk profile and investment returns need to be taken into account. Sometimes, the cost to produce and get to the end consumer can be more than it is worth to the end customer.
So, if you need a hand to figure out how to get the price right, contact us.