| Sometimes pricing your products seems like an | | | | strategy.Demand-Based Pricing: |
| adventure into a strange new world. The process can | | | | Definition: Price depends upon your customers' |
| seem too complicated for anyone but a rocket | | | | perception of your products' value and the level of |
| scientist to comprehend. Our goal is to bring this | | | | demand for your item. Your product must provide a |
| process back to Earth for you by explaining some | | | | unique benefit to your target market. |
| pricing basics.How do you price your product now? | | | | Example: Your product has prestige appeal so it can |
| Answers from businesses can vary from "less than | | | | be priced in a range well above the cost of production. |
| our competition" to "the highest price my customer will | | | | For example, luxury cars and gourmet food have |
| pay." Either tactic has a negative side that can cost | | | | prestige appeal. |
| your company customers and profits. Because most | | | | Caution: Success depends on your knowledge of |
| of you are too busy to be rocket scientists in the | | | | your customers and your market. You must have an |
| pricing galaxy, we developed this series of steps to | | | | uncanny skill for accurately estimating customer |
| help you understand pricing - no space ship required.1. | | | | demand to avoid disappointing sales |
| DO YOUR HOMEWORKKnow Costs: There is no | | | | results.Competition-Based Pricing: |
| substitute for thoroughly understanding your product | | | | Definition: Price is set in relationship to your |
| costs and the variability of those costs - that means | | | | competition's prices. In some cases this may be below |
| the resources used to create, produce and market | | | | cost and is usually indicative of a product that has no |
| your product. Unless you know all your costs by | | | | competitive edge. |
| product and by customer you could be losing, rather | | | | Example: You are caught in an industry "price war" |
| than making, money with each sale.Understand Market | | | | where all products must compete on the basis of price |
| Value: Realistically compare your company's product | | | | or risk losing their market share. |
| to your customer's expectations and perceptions. You | | | | Caution: Your company's long-term goals may be |
| must also understand your competition and trends in | | | | sacrificed in the interest of competitive pricing. Also, |
| your target industry.Set Objectives: Once you have a | | | | you are at the mercy of the larger companies in your |
| thorough understanding of your costs it's time to | | | | industry that can afford short-term losses in order to |
| explore two of the ways your company can set | | | | play this expensive game of war.Value Pricing: |
| pricing objectives. Generally, pricing philosophy is based | | | | Definition: Gives your customer more quality for less |
| on company goals such as:Sales Growth - For a | | | | than they expected to pay. |
| variety of reasons, such as immediate expansion | | | | Example: Used when you want to gain market share, |
| needs, a company may set sales growth as an | | | | position your product with customers, or obtain market |
| objective. When selecting this as an objective, it is | | | | acceptance of a new product. |
| critical to remember that higher sales do not | | | | Caution: Product quality must be consistent and your |
| automatically produce higher profits. In fact, sometimes | | | | company must operate efficiently for this to be an |
| the cost of expanding sales volume, such as increased | | | | effective strategy. Using this strategy means that you |
| costs of production, distribution or customer service, | | | | understand your customers and competitors very well. |
| becomes so great that profits actually decrease.Profit | | | | In addition, you may find it difficult to raise prices to |
| Growth - Frequently, corporate goals such as a | | | | more profitable levels once your initial distribution goal is |
| targeted return on investment or a profit maximization | | | | achieved.3. TEST YOUR PRICING THEORYPricing |
| philosophy necessitate a "pricing for profit" objective. | | | | your products is almost as complex as rocket science |
| Be sure you take both short and long-term profit goals | | | | but not quite as predictable. At best, your product |
| into account when implementing this objective. Also, | | | | pricing is based on information that can change daily or |
| study the implications of each pricing change on the | | | | even hourly. For that reason, it is critical that you test |
| health of your business.2. SELECT YOUR | | | | the validity of your pricing strategies with a small |
| STRATEGYIt's now time to select your pricing | | | | customer sample or market segment and evaluate |
| strategy based on your costs, company objectives | | | | your pricing periodically to adapt to changing market |
| and the perceived market value of your product. | | | | conditions.Deborah Henken served as VP of Marketing |
| Although strategies can become quite complicated and | | | | at several Silicon Valley start-ups and channel positions |
| detailed, the following list discusses basic options most | | | | at Hewlett Packard, Informix and BEA Systems. She |
| companies find useful. Your choice depends on an | | | | earned her MBA from the Kellogg Graduate School of |
| internal assessment of your company's objectives and | | | | Management at Northwestern University. Deborah is |
| an objective analysis of the market in which you | | | | Founder of the Highland Team.Susan Henken has |
| compete.Cost-Based Pricing: | | | | directed marketing at consumer and health care |
| Definition: Price is based on a product's total fixed and | | | | companies for more than 15 years. She provided |
| variable costs. | | | | marketing consulting to manufacturing companies at |
| Example: Typical pricing in commodity markets. For | | | | Minnesota Project Innovation through a grant from the |
| example, a commodity-type raw product such as steel | | | | SBA and Department of Commerce and ran her own |
| is priced using a standard formula based on cost. | | | | consulting business. She is currently |
| Caution: If you use this exclusively, you must be able | | | | Director of Marketing for Consumer Products at |
| to stay in business with a very low profit margin. In | | | | Compex Technologies. She earned her MBA from the |
| non-commodity businesses, this option should be only | | | | Kellogg Graduate School of Management at |
| one aspect of the total product pricing | | | | Northwestern University. |