So you have a potential wallet bulging industry leading product (for the sake of this post the product will be both product and service), now you have the tricky task of attempting to price it in order to see if you can take your product to market. Do not take this task likely, as this is the one element which can really deem your product a success or a complete failure.
Why should you take this seriously?
We are all consumers in various shapes and forms. Regardless of industry, if we want to purchase something, our previous experiences in trading/purchasing will influence any future purchases that we make.
If we think the item is expensive and available elsewhere for less, depending on convenience and level of demand we will more than likely purchase elsewhere.
Let me elaborate a little on the second part of that quote. If the product is more expensive; more expensive due to economical reasons it will still sell. But what are economical reasons.
-Elasticity of Demand in simple terms-
Lets start with demand. If the any change in price reflects in the demand of the product, for example an increase in the price of one type of car where there are many similar versions of the same car available on the market will see the more expensive car’s demand decrease as consumers can get the same thing elsewhere for less. This product would be regarded as Elastic. The demand is influenced by the price thus careful market research is paramount to success. If your product is due to enter a saturated (many products of the same type) market your price needs to be on par if not less than competitors in order to succeed.
The exact opposite, an inelastic product, sees very little or no changes in demand if the price is changed. A very common example is fuel (petrol or diesel). If the fuel price changes tomorrow morning there is not much consumers can do, they still need fuel. The alternatives like cycling, walking, buses and trains do not have a strong enough influence which mean that in general if the price of fuel goes us so does the revenue. Where the opposite is true for most consumables, if the price of Pepsi goes up it is inevitable that revenues on the soft drink would decrease hence Pepsi being an elastic demand product.
If the product is elastic- Price goes up, Revenues go up
If the product is inelastic- Price goes up, Revenues go down.
What does all of the above mean for you?
The brief and topical economics lesson above is aimed to help you determine the elasticity of your products’ demand. The greater the elasticity of your product the closer to your competitors prices your product will have to be in order to compete.
-Consider the costs-
Not just the costs to make/assemble the product but every penny it has cost your company in order to place that product on the shelves/market. These are both fixed rent and variable costs.
Fixed- salaries, rent, council tax or anything that does not change in cost very often.
Variable- raw materials, commission on any sales or influenced by the number of goods produced or services produced so for example if you produce clothing and you make more and more of it each month your raw material costs will go up.
If you are starting out don’t forget to include your own wage, you probably won’t take much out to start with but there is no point in going to market if your product makes no profit, sounds simple but sometimes simple or obvious areas are disregarded.
Attempt to evaluate every penny, start with the most obvious costs and just write them down. If you are Excel or spreadsheet savvy, there are multiple template free to download with many costs already highlighted. If you did an initial business plan (which I hope you have done is this is the best
-Market Analysis is key-
1. What are your competitors charging for the same product?
2. If no one else sells/provides the product, what are your potential customers willing to pay?
If you have an outstanding product which you are confident will sell but there are others that provide similar products. The price will undoubtedly be in line with your competitors product prices if most of the product characteristics are the same. The more your product differentiates from the rest of the market, the more flexibility you will have on setting the price.
-Google is your friend-
The beauty of our modern technologically advanced society is that you can do most of the research online. Most of the initial information can be gathered relatively quickly. You can determine in no time at all if your product is viable, if its actually worth investing more time and effort to make it happen. The added bonus of online research is that initial market research costs are minimal.
Once you have determined that you have a good change of not only launching your product into a viable market but that your will make a profit. It will be worth while investing a little more into doing more thorough research, don’t be discouraged to use companies like TNS Global (large market research company) however they may be a little above your budget; larger organisations often use companies like TNS to get insight into markets. The world is your oyster, its worth researching which companies specialise in your market. The chances that your product is completely unique is minimal, which sounds harsh but there is probably more chance of finding market relevant information which makes pricing your product that bit easier.
The key point in the post is about the uniqueness of your product, the more unique it is the more you can deviate of the industry standard cost.
IMPORTANT TIP- If your product enters the market at a much lower cost than your competitors may not create the best image for your product. Potential clients may think that it is of inferior quality in comparison. The other issue is that if you priced your product to low you will find it extremely difficult to increase at a later time. With all of the above in mind you could always have the price slightly higher to see how the market accepts it. If you are doing well with it keep it the same, if not lower it a little.
Don’t taking pricing likely, the information above will help however you need to do quite a bit of research to ensure that you are not only selling your product but making a profit.