There are various approaches to pricing products and services, and also to improving existing pricing, that we thought worth discussing. @hughrheinsohn has worked with a pricing consulting firm that does this professionally for some large corporations internationally; @cfisk studied pricing with one of the gurus at the Univ. of Chicago.
- Thomas Nagle, “Strategy and Tactics of Pricing,” http://www.amazon.com/Strategy-Tactics-Pricing-Profitable-Decision/dp/013026248X
- Sarah Maxwell, “The Price is Wrong: Understanding What Makes a Price Seem Fair and the True Cost of Unfair Pricing,” http://www.amazon.com/Price-Wrong-Understanding-Unfair-Pricing/dp/0470139099
Product Pricing Promotion Placement
Hugh: Pricing includes things like how you handle returns – how many days are allowed to return a product.
It's okay to charge different people or groups different prices based on “willingness to pay.” Can determine this by surveys (ask them) or by testing it. Segment the market.
Craig: Think about pricing as something that contributes to the positioning of the product. Esp. relative to other products in the market.
It's important to test pricing – offer different pricing in different areas in a beta program, for example.
If I know my cost, how do I determine the amount to mark up? Hugh – that's the worst way to set price. You want to look at the value to the customer.
Steve: It's a different game for an established company than a new venture. You can spend a lot of time and money before you're ready to sell a new product. But, there are ways you can do some cost analysis up front to determine whether your product will be profitable.
is very important to know your cost.
Peter: consider volume-based pricing.
Another problem: getting people to pay. Competing with Walmart. People in Portland don't want to part with their money. Look for “aspirational buyer.” How do you get your foot in the door?
* Promotional pricing to a high-visibility customer * Or you get lucky and catch a potential customer when they're desperate Moving on, sometimes it's better to sell to a smaller market at a larger price to maintain profitability. When considering dropping price, calculate how much you need in additional sales to be profitable at the lower price. It can surprise you.
Classic example: GM promotional pricing, sold trucks an employee price to people who were going to buy anyway, several months later. Didn't increase sales. (Stock did go up briefly.)
At the low end of pricing, your volume goes up as price goes up, because people take you more seriously. A goal is to find the sweet spot before raising the price decreases demand.
Steve: even before you address what the pricing will be, you have to determine whether there is a compelling unmet need.
Chris: attempting to carve out a niche by limiting the scope of his product.
Look at the costs from the customer's point of view in terms of time and money.
What potential customers say they want is not necessarily what they actually want.
Craig: Price is a key piece of information for you to manage in your business and even more informative if you can maintain some kinds of dynamic control over it, like seasonal or regional price differences, discriminatory pricing via bundled services to different customer segments.
Back to the price/demand curves - how do you calculate them? There are survey techniques for getting a pretty good idea of what value customers put on something.
Steve: OTBC is having a workshop on June 2 at OTBC on Validating Your Market. On May 5 at noon at OTBC, there will be a public talk by Elia Freeman on iPhone app pricing.
Also look for info on “conjoint analysis.”
For products, eBay is a great place to look for pricing information.
The iPhone is a fascinating study in pricing. Example: developer sold apps for Palm for $40, had to sell on iPhone app store for <$10.
Once you are successful, never assume you can't improve.