News & Observer
Published Sun, Nov 29, 2009 05:37 AM
Modified Sun, Nov 29, 2009 04:42 AM
Modified Sun, Nov 29, 2009 04:42 AM
Grace Ueng is founder and CEO of Savvy Marketing Group in Cary. She has taught entrepreneurial marketing at UNC's Kenan-Flagler Business School. For several weeks in Work & Money, Ueng is offering her 12-step guide to marketing. Last week, she discussed how employees and customers are crucial to how you market (to catch up, go to www.newsobserver.com/ business ).
Step 7: Optimize Pricing:
Pricing is a much debated topic for entrepreneurs launching products. A company does not want to price too high and be unobtainable. Nor does it want to leave money on the table by pricing too low.
The best way to gauge pricing is to ask prospective customers. But just asking them what price they would pay has a couple of problems. People often tell you what they think you want to hear. If the product is truly new, they too will have trouble coming up with a price, because they have no benchmarks.
One method is an online, random sample survey that describes and even shows pictures of the product. Then, ask four questions:
1. At what price would you consider this a bargain?
2. At what price would you consider this expensive?
3. What price would be so inexpensive that you would question the quality?
4. What price would be so expensive that you would not consider the product?
The intersection of the plotting of the four curves resulting from the answers leads to a price point and an optimal price. By asking for prices rather than having them react to given price points, you get an unbiased, frank pricing range and optimal price for the product.
Our firm was asked by Morrisville-based Centice to conduct pricing studies for its Pass Rx pharmaceutical verification product. Since there was no other product like theirs on the market, we researched pricing by conducting one-on-one interviews with decision-makers and influencers attending a national trade show where Centice was already planning to exhibit. We drafted price-related questions to be asked after the pharmacy staff saw a demo of the product. We offered a Starbucks gift card for their time.
Later, we followed up with a subset of those interviewed, asking questions drafted after analyzing the results of the trade show findings. We also followed up by phone with another target segment not represented at the trade show.
Clay Ritchie, vice president of marketing and strategy for Hill-Rom IT Solutions, faced a very different situation from that of Centice: Their product had established competition. So they pursued a feature-based pricing strategy.
"We wanted to be able to make sure that our system was being evaluated, from a price perspective, on an apples for apples comparison with the competition," Ritchie said. "So we priced the base system (which had apples for apples features with competitive offerings) to the competitive market pricing our research had provided us.
"This is a start low, go high strategy. With a baseline established at parity, we then are able to value price the additional options and modules to the baseline."
They also conduct return on investment studies and a win/loss analysis that gives them a view of market pricing and value pricing.
Other questions: How many components make up your product? Is there an initial investment required followed by regular updates or add-ons? In order to make the hurdle of market entry lower, can the initial investment be staged as a loss leader and investment in order to gain future revenue from that same customer?
Are there options to lease versus own on higher ticket items? What is the best way to make the entry point attractive to the purchaser?
Can you offer different pricing and product variations to different channels based on their pricing sensitivities? Are there certain pricing thresholds that require an additional level of approval which could slow or halt the sales process substantially?
How much in demand is your product, and how many suppliers are there? If your product truly is unique, you can demand a higher price.
It is important to classify your product in a realistic light. Has your product offering become nearly a commodity? Or is it truly a luxury class product or service?
Remember that while it is easy to drop a price, it's harder to increase one, so be careful about discounting. Consider instead offering a trial price as well as volume pricing.
If you must discount, be sure to get something in return that will help you build your business such as speaking on your behalf at an industry show.
Step 7: Optimize Pricing:
Pricing is a much debated topic for entrepreneurs launching products. A company does not want to price too high and be unobtainable. Nor does it want to leave money on the table by pricing too low.
The best way to gauge pricing is to ask prospective customers. But just asking them what price they would pay has a couple of problems. People often tell you what they think you want to hear. If the product is truly new, they too will have trouble coming up with a price, because they have no benchmarks.
One method is an online, random sample survey that describes and even shows pictures of the product. Then, ask four questions:
1. At what price would you consider this a bargain?
2. At what price would you consider this expensive?
3. What price would be so inexpensive that you would question the quality?
4. What price would be so expensive that you would not consider the product?
The intersection of the plotting of the four curves resulting from the answers leads to a price point and an optimal price. By asking for prices rather than having them react to given price points, you get an unbiased, frank pricing range and optimal price for the product.
Our firm was asked by Morrisville-based Centice to conduct pricing studies for its Pass Rx pharmaceutical verification product. Since there was no other product like theirs on the market, we researched pricing by conducting one-on-one interviews with decision-makers and influencers attending a national trade show where Centice was already planning to exhibit. We drafted price-related questions to be asked after the pharmacy staff saw a demo of the product. We offered a Starbucks gift card for their time.
Later, we followed up with a subset of those interviewed, asking questions drafted after analyzing the results of the trade show findings. We also followed up by phone with another target segment not represented at the trade show.
Clay Ritchie, vice president of marketing and strategy for Hill-Rom IT Solutions, faced a very different situation from that of Centice: Their product had established competition. So they pursued a feature-based pricing strategy.
"We wanted to be able to make sure that our system was being evaluated, from a price perspective, on an apples for apples comparison with the competition," Ritchie said. "So we priced the base system (which had apples for apples features with competitive offerings) to the competitive market pricing our research had provided us.
"This is a start low, go high strategy. With a baseline established at parity, we then are able to value price the additional options and modules to the baseline."
They also conduct return on investment studies and a win/loss analysis that gives them a view of market pricing and value pricing.
Other questions: How many components make up your product? Is there an initial investment required followed by regular updates or add-ons? In order to make the hurdle of market entry lower, can the initial investment be staged as a loss leader and investment in order to gain future revenue from that same customer?
Are there options to lease versus own on higher ticket items? What is the best way to make the entry point attractive to the purchaser?
Can you offer different pricing and product variations to different channels based on their pricing sensitivities? Are there certain pricing thresholds that require an additional level of approval which could slow or halt the sales process substantially?
How much in demand is your product, and how many suppliers are there? If your product truly is unique, you can demand a higher price.
It is important to classify your product in a realistic light. Has your product offering become nearly a commodity? Or is it truly a luxury class product or service?
Remember that while it is easy to drop a price, it's harder to increase one, so be careful about discounting. Consider instead offering a trial price as well as volume pricing.
If you must discount, be sure to get something in return that will help you build your business such as speaking on your behalf at an industry show.
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