Naming your price

Author: Michael D. Mondello

Date: July 1992
From: Inc(Vol. 14, Issue 7)
Publisher: Mansueto Ventures LLC on behalf of Inc.
Document Type: Article
Length: 2,003 words

Abstract:

Putting a price on products and services is one of the most

important business decisions there is to be made, yet many
times it is done in a very haphazard way. Managers planning
effective pricing consider not just costs and demand, but also
use as a form of marketing.
Full Text:

For small companies in particular, few decisions are as

important--and as neglected--as price setting. Here's how to
create a pricing strategy that does what you need it to

A VERMONT GROCERY-STORE OWNER ONCE SHARED his

pricing philosophy with a sales rep: "What you charge tells me
how low I can go. What my competitor sets prices at is how
high I can go. I just pick a place in between, and that's my
price."

That Vermont grocer is not alone. Many companies approach

pricing in much the same unimaginative way. Most managers
simply don't think about pricing as a marketing tool that can
be used creatively to build their businesses. And yet for many
companies (particularly start-ups or small, growing
businesses) there is no other marketing or sales decision that
more immediately affects customer acceptance or rejection of
what you sell, your cash flow, and perhaps even your overall
success or failure. What's more, even if your company has
been around for a while, chances are, you're using the same
approach to pricing you developed 5 or 10 years ago.

The goal here, then, is not to tell you how to price your
products or services. Instead, it's to help you step back and
take a fresh look at your company's pricing policies so you
can compete better and, ultimately, make more money.
IN THE BEGINNING

BEFORE YOU CAN FIGURE OUT HOW TO MAKE PRICING

REALLY work for you, you have to know what it is specifically
you want pricing to do for your business. In other words, what
are your company's goals? To increase sales? To increase
market share? To maximize cash flow or profit? To deter
competition from entering your company's niche? To lower
demand so you can stay within your current production
capacity? To get more people to try your product or service?
To establish a particular image? Some combination of those
objectives? Once you've given serious thought to what you
want to accomplish, write it down. That may sound trivial, but
I can't emphasize it enough. Those written goals will be what
keeps you on track when you begin to try out different pricing
ideas. They'll be the measure you'll use to judge what is or
isn't appropriate so your pricing decisions will be in line with
your company's objectives.

WHAT YOU NEED TO KNOW

IS PRICING A MARKETING DECISION? A SALES DECISION? A

financial decision? Highly effective pricing decisions are all of
those. If you have separate managers for those functional
areas of the business, each should play a role in building your
pricing strategy. If you serve in all those roles, then be sure to
wear all the hats as you think about pricing. Otherwise, your
pricing decisions will not take into account everything
necessary to make them highly effective. By approaching
pricing from a multifunctional view, you'll be sure to include
each of the "Five Cs of Pricing." (A college professor once
taught me that there are three Cs; experience has added two
more!)

1 Costs.

This is the most obvious component of pricing decisions (the

"what you charge me" in our Vermont grocer's strategy). You
obviously cannot begin to price effectively until you know your
cost structure inside out, and that includes both direct costs
and fully loaded costs (in other words, anything beyond
product costs) such as overhead, trade discounts, and so on.
And it means knowing those cost structures for each item or
service you sell, not just on an average companywide or
product-line basis. Too often managers make pricing decisions
based on average cost of goods when, in fact, huge margin
variations exist from item to item.
2 Customer.

Ah, the customer, the ultimate judge of whether your price, in

combination with quality of service or product, delivers a
superior value. How exactly do your customers or potential
customers view price? You can bet they do not see it as a
single number, but instead, view it in a wide variety of ways.
So when you consider your pricing strategy, ask your
customers for their input. You may be surprised at the
answers you get. For instance, when a colleague and I were
designing a mortgage-evaluation service, we called recent
home buyers, described the idea to them, and asked two
simple questions: What do you think this service would cost?
Would you have bought the service when you were shopping
for a mortgage? Their answers astonished us. Customers
expected and were willing to pay two to three times what we
were planning to charge.

Here's the information you'll want to know: What is the

customer's expected range--the highest and lowest price
points available--for your product or service? Within that
range, what is your specific target customer's acceptable
range, the highest and lowest he or she will pay? Both the
high and the low points in those ranges affect how your
customers view price, and it is important to realize that the
ranges have not just a top end but a bottom end as well.

Which prices do customers look at? Soda prices provide a

good, simple example. There's the absolute price ($1.29 for a
two-liter bottle of Coke); the relative price (compared with a
two-liter bottle of Pepsi, or even with other Coke products,
such as a six-pack of cans at $2.29); the standard price (per
ounce at about 6]); and, of course, the regular versus sale
price (99] "on special," almost every other week). Which ways
do your customers look at the price of what you sell?

Beyond what you charge, what are the other costs customers
think about as they consider your product or service? Are
there any search costs (such as costs in time and money to
shop around for a sales-meeting site)? Are there transaction
costs (such as the shipping and taxes and the cost of
borrowing money to buy a boat)? Are there switching costs
customers must pay to change from the product or service
they are now using (such as fees to swithc phone services, or
the aggravation and paperwork involved in switching checking
accounts)? Are there costs of related purchases (such as a
customer's having to pay someone else to put up the
wallpaper he or she buys from you)? All of those factors may
enter into the customer's thinking about price in your
business, even though they have nothing to do with what you
charge. So to be smart about your pricing choices, you have
to think about those unseen elements. Sometimes they
represent limitations. Other times they provide great
opportunities. For example, gambling casinos often structure
their prices to eliminate the other costs involved in the
purchase by providing free travel to their location. Essentially,
they've turned costs of related purchases into part of the deal.

3 Channels of Distribution.

If you sell through any middlemen to get to the end-users of

your product or service, then those intermediaries affect your
pricing in two ways. First, you have to price so their margins
will be large enough to motivate them to do what you need
them to do. Second, you must consider the margins they add
that affect the price your end-users ultimately pay.

4 Competition.

This is where managers often make their fatal pricing

decisions. First of all, don't kid yourself. Every company and
every product has competition. Even if your product or service
is unique (whatever that really means), your potential
customer has been getting by without it until now, so there
must be alternatives, however remote they may seem to you.
Make sure, as you consider pricing approaches, that you think
very carefully about whom you compete with from the buyer's
point of view (the only point of view that matters). If you don't
know all the alternatives buyers evaluate you against, pick up
the phone and ask a few of them.

5 Compatibility.

Pricing is not a stand-alone decision. It must work in concert

with everything else you're trying to achieve as a company. Is
your pricing approach compatible with your marketing
objectives? With your sales goals? With the image you want to
project? Again, those objectives have to be explicitly stated
and written down. If your production goals, for instance, are to
even out the process so you can better control inventory, the
last thing you want is a pricing strategy that forces seasonal
spikes in demand.
HOW TO BREAK THE MOLD

OK, YOU'VE FIGURED OUT WHAT YOU WANT YOUR PRICING to

achieve (you wrote it down, remember?), and you and your
managers have thoroughly examined the Five Cs of Pricing as
they apply to your business. Now you're ready to start
thinking creatively and proactively about pricing. To do that,
you have to follow one simple rule: Forget absolutely
everything you know about "how it's done in my business,"
and start looking at how it's done in other businesses. Then
think about how other companies' and industries' pricing
approaches might be applied (either directly or indirectly) to
pricing your company's products or services. One more rule:
Never look at a pricing approach from other companies or
industries and think, Well, that would never work in my
business. That sort of thinking is the kiss of death. Instead,
always ask, How could that kind of pricing--or some variation--
possibly be applied to my business?

To help you get started, you'll find 19 pricing approaches

outlined in the Creative Pricing Primer. (See page 82.) These
examples come from consumer products and services and
business-to-business situations. The approaches presented
are not mutually exclusive, and they are certainly not all-
inclusive. They are offered as a way to stimulate ideas that
will work for your company. Here's your assignment (after all,
this is a mini-M.B.A. course): go through the primer, and for
every approach presented, jot down in the space provided
some way your company might be able to use that type of
pricing.

FINAL HINTS

AS YOU CHALLENGE YOURSELF AND YOUR PEOPLE TO

APPROACH pricing with imagination and an open mind, here
are several other considerations that can make you more
effective.

1. Do not limit new pricing strategies to new products.

Challenge the pricing on your existing products or services.
How can you price differently to achieve your objectives?

2. Do not sell yourself short. The most common mistake in

pricing is to assume you must price low. Find creative ways to
figure out how high you can go. Can you test it somehow?
Talk to potential customers about pricing. An old proverb
says, "There are two fools in every market. One charges too
much, the other not enough." Don't be a fool--either way.

3. When making a price increase, try to time it with other

changes in your product or service that add value. The car
companies, for instance, raise their prices when the new
models come out.

4. If you're thinking about lowering price, make sure you

crunch the numbers to see how big an increase in sales you'll
need just to get back to the levels of cash flow and profit you
have now. An obvious point, maybe, but it's often overlooked.

5. Never stop looking for new pricing ideas. When you're

shopping for anything as a consumer or a professional, think
about how products or services are priced. Then try to apply
the thinking to your business. Ask your managers and
employees to do the same and report back to you.

Whoever first said "A penny for your thoughts" obviously

assumed the seller would take a rather straightforward and
unimaginative pricing approach. I'll bet the seller would
improve profit margins by charging a nickel for the first
thought and then using a stair-stepping approach for every
thought after that, up to a limit of...well, you get the picture.
Copyright: COPYRIGHT 1992 Mansueto Ventures LLC on
behalf of Inc.
http://www.inc.com/
Source Citation (MLA 9th Edition)
Mondello, Michael D. "Naming your price." Inc., vol. 14, no. 7,
July 1992, pp. 80+. Gale OneFile: Entrepreneurship,
link.gale.com/apps/doc/A12380971/PPSB?
u=otta35732&sid=bookmark-PPSB&xid=b5ce0d08. Accessed
12 Jan. 2023.

Gale Document Number: GALE|A12380971