Finding a Price That’s Right
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Have you ever made a purchase without first looking to see how much the item cost? Most of us need to know the price before approaching the checkout counter, if for no other reason than to decide if we feel the item is worth its cost. Our willingness to pay is dependent upon a number of factors: our expectations of price based upon our knowledge of similar items, our perceptions of value based upon visual cues from the packaging and merchandising, and finally our knowledge or previous experience with the brand. Pricing is a challenging task. Maximizing revenue without deterring purchases is the goal of anyone who’s selling something. Being mindful of what considerations the purchaser will evaluate will help reveal a price that’s agreeable to consumers and attractive to your bottom line.
Cost Plus Pricing
Whether you are a retailer or a manufacturer, there are costs incurred in order to sell an item. Of course there is the cost of the item itself. However, don’t forget to consider operational expenses such as rent, utilities, and employees as well as marketing expenses and any other costs required to facilitate business.
“Cost plus” pricing takes the cost of the item and adds in a factor for operational expenses and profit to determine price. Many businesses use this type of pricing strategy as it is the most straightforward. While cost plus pricing seems logical on paper, it doesn’t take into account other factors that motivate the consumer’s purchase decision. So while a price may make sense to you, it may not make sense to the consumer. Numbers that look great on paper but don’t translate into revenue are unproductive towards success.
Competitive Pricing
Cost plus pricing is a good exercise that can be used to create a baseline to understand where the pricing needs to be to maintain a productive business. Then it should be massaged to account for competitors’ pricing. It’s wise to know what your competitors are charging for like items. Surely your consumers are aware of at least the range a product should be priced within. If the price they find is too high or too low, this may cause confusion and doubt as to the product’s actual value.
Occasionally, select items are under-priced on purpose to drive business. This is called loss leader pricing. Please be mindful that loss leader pricing is a tactic and not a sustainable pricing strategy. Clear communication needs to be made to assure consumers that the pricing is not indicative of the product’s value, but rather a temporary promotional effort.
How Perceived Value Can Effect Pricing – Packaging
Perception can transform into reality or more specifically revenue. Never underestimate the value of attractive packaging. Packaging that elicits connotations of a premium product can help to appreciate the perceived value of a product. Of course, fancier packaging will cost more, but when cleverly executed the perception of value will exceed the actual cost and the difference will equate to higher margins.
Other cues towards higher value can be achieved through merchandising. A smart display that reinforces a belief that the product comes from a well-established company can also bolster the value assigned to the product. To understand what the perceived value is, make sure you ask plenty of consumers to understand what their willingness to pay would be. This research will reveal what the probable price for the product should be, and how the packaging and merchandising add to or detract from the actual market value.
How Perceived Value Can Effect Pricing – Branding
A revered brand can translate into dollars to the manufacturer or retailer that fosters it. Brand is the one attribute of a product that is intangible, yet will yield the greatest willingness to pay by customers. Brand equates to trust, loyalty and cache. All these attributes relating to brand touch people on an emotional level and encourage them to pay higher prices for items, even though similar items at lower prices are available.
A company that makes a concerted effort to build, nurture and grow its brand will reap the rewards when it comes to product pricing. Quite simply, people will pay more for branded products because of the emotional attachment and personal relationship they possess with the brand.
Cost + Competition + Perceived Value = $$$
The hardest decision after deciding what to sell is of course, deciding what to charge. Taking into consideration the absolute cost of the product as well as your operational expenses will illuminate what the approximate price needs to be for the business to remain solvent. Considering the prices of similar items will provide a range that will be acceptable in the market place. Attractive packaging can give you some extra margin points. Building brand awareness and loyalty will further increase your ability to grow profit. To know exactly what price is right for you, consider these strategies and put them into practice. Of course, the consumers will be the true litmus test to determine willingness to pay; make sure you frequently seek out their input to make sure your products are priced just right.
About Insights Discovered
Penny Redlin is a regular contributor to the “Business Sense” feature on The Giggle Guide, sharing insights about business planning, effective communications and marketing strategies. To read more articles by Penny Redlin, see http://thegiggleguide.com/biz/features/business-sense
Based in Las Vegas, Nevada, Insights Discovered was founded by Penny Redlin in an effort to share her professional expertise within the children’s product category. The company’s mission is to give every mompreneur an opportunity for success. Insights Discovered exclusively services children’s products brands. The specific industry focus demonstrates a strong dedication to the unique needs of children’s products companies. Insights Discovered offers strategic planning, market research and traditional marketing services.
For more information, visit www.insightsdiscovered.com or call 702.218.5707
