Marketing Management

Agnes Lorenza

LE 53

2101657202

How the company to establish the product (good, service and idea) price
Answer
1. Get Clear about Making Money

The first step is to get real clear about what you want to achieve with your pricing strategy: You
want to make money. That's why you own a business. Making money means generating enough
revenue from selling your products so that you can not only cover your costs, but take a profit
and perhaps expand your business.
The biggest mistake many businesses make is to believe that price alone drives sales. Your
ability to sell is what drives sales and that means hiring the right sales people and adopting the
right sales strategy. "The first thing you have to understand is the selling price is a function of
your ability to sell and nothing else," says Lawrence L. Steinmetz, co-author of How to Sell at
Margins Higher Than Your Competitors : Winning Every Sale at Full Price, Rate, or Fee (Wiley
2005) and a business consultant in Boulder, Colo. for 40 years. "What's the difference between
an $8,000 Rolex and a $40 Seiko watch? The Seiko is a better time piece. It's far more
accurate"¦. The difference is your ability to sell."
At the same time, be aware of the risks that accompany making poor pricing decisions. There
are two main pitfalls you can encounter - under pricing and over pricing.
2. Understand Your Other Business Priorities

There are other reasons to go into business. Understand what you want out of your business
when pricing your products. Aside from maximizing profits, it may be important for you to
maximize market share with your product -- that may help you decrease your costs or it may
result in what economists call "network effects," i.e. the value of your product increases as more
people use it. (A great example of a product having network effect is Microsoft's Windows
operating system. When more people began to use Windows over rival products, more software
developers made applications to run on that platform.)
You may also want your product to be known for its quality, rather than just being the cheapest
on the market. If so, you may want to price your product higher to reflect the quality. During a
downturn, you may have other business priorities, such as sheer survival, so you may want to
price your products to recoup enough to keep your company in business.
3. Know Your Customer

Undertaking some sort of market research is essential to getting to know your customer, Willett
says. This type of research can range from informal surveys of your existing customer base that
you send out in e-mail along with promotions to the more extensive and potentially expensive
research projects undertaken by third party consulting firms. Market research firms can explore
your market and segment your potential customers very granularly -- by demographics, by what
they buy, by whether they are price sensitive, etc.. If you don't have a few thousand dollars to
spend on market research, you might just look at consumers in terms of a few distinct groups --
the budget sensitive, the convenience centered, and those for whom status makes a difference.
Then figure out which segment you're targeting and price accordingly.
4. Know Your Costs

A fundamental tenet of pricing is that you need to cover your costs and then factor in a profit.
That means you have to know how much your product costs. You also have to understand how
much you need to mark up the product and how many you need to sell to turn a profit.
Remember that the cost of a product is more than the literal cost of the item; it also includes
overhead costs. Overhead costs may include fixed costs like rent and variable costs like shipping
or stocking fees. You must include these costs in your estimate of the real cost of your product.
5. Know Your Revenue Target

You should also have a revenue target for how much of a profit you want your business to make.
Take that revenue target, factor in your costs for producing, marketing, and selling your product
and you can come up with a price per product that you want to charge. If you only have one
product, this is a simple process. Estimate the number of units of that product you expect to sell
over the next year. Then divide your revenue target by the number of units you expect to sell
and you have the price at which you need to sell your product in order to achieve your revenue
and profit goals.
If you have a number of different products, you need to allocate your overall revenue target by
each product. Then do the same calculation to arrive at the price at which you need to sell each
product in order to achieve your financial goals.
6. Know Your Competition

It's also helpful to look at the competition -- after all, your customer most likely will, too. "Are
the products offered comparable to yours? If so, you can use their pricing as an initial gauge,"
Willett suggests. "Then, look to see whether there is additional value in your product; do you,
for example offer additional service with your product or is your good of perceived higher
quality? If so, you may be able to support a higher price. Be cautious about regional differences
and always consider your costs."
It may even be worthwhile to prepare a head-to-head comparison of the price of your

product(s) to your competitor's product(s). The key here is to compare net prices, not just the
list (or published) price. This information could come from phone calls, secret shopping,
published data, etc. Make notes during this process about how your company and products --
and the competition -- are perceived by the market. Be brutally honest in your evaluation.
7. Know Where the Market Is Headed

Clearly you can't be a soothsayer, but you can keep track of outside factors that will impact the
demand for your product in the future. These factors can range from something as simple as
long-term weather patterns to laws that may impact future sales of your products. Also take
into account your competitors and their actions. Will a competitor respond to your introduction
of a new product on the market by engaging your business in a price war?

Marketing Management

Uploaded by

Copyright:

Available Formats

Marketing Management

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Marketing Management

Uploaded by

Copyright:

Available Formats

Agnes Lorenza

1. Get Clear about Making Money

2. Understand Your Other Business Priorities

3. Know Your Customer

4. Know Your Costs

5. Know Your Revenue Target

6. Know Your Competition

It may even be worthwhile to prepare a head-to-head comparison of the price of your

7. Know Where the Market Is Headed

You might also like