Pricing Strategy

InactiveMember

The topic of pricing doesn`t receive much attention [ here or anywhere else! ] because it is a bit dry and regarded as a black art by most people. When I see pricing questions, I often recommend a book "The Strategy & Tactics of Pricing". This is a link to an article that is basically an excerpt from the book. I`m not going tell anyone that the article is "light reading" but the information is excellent ... and as far as I am concerned, a must-read for any serious entrepreneur. Absolutely worth printing and reading.
Pricing Article - From Monitor Consulting

bert

I agree.  This is a good book that I have read and recommend too.  It has help me rething things several times over.  I will say my sales department hates with I referrence it because it forces them to work but they aways like the end results.

iouone2

CookieMonster... I think you`re right. Pricing does become a dry subject when you (a discussion from two) really get into it. Not only that, but as one start a business, they are thinking more about brand identity, products to provide, communication methods with customers, where to advertise (hunt for customers), and all that legal stuff you have to have in order. It`s easier to work on problems which you can see immediate results.I think, pricing is thought of as a "no brainer" when the reality of the business world clearly confirms it`s importance in the scheme of things. We (you and I) have had a couple brief discussions about pricing in which others have joined in, but in general, I think you are absolutely right. Business owners probably think more like I do when it comes to pricing strategy. Equation:Wholesale cost ($) - What people will pay ($) = your profitPricing I believe is one of the most difficult subjects, more so than marketing, to grasp. I know I have read many boring articles about pricing. Some of which I find quite complicated and difficult to get my mind around. It`s a subject I admit to knowing very little.On the level in which I find most new entrepreneurs, I think the subject is set aside because sales are not rolling well enough to experiment effectively with pricing strategies. If your sales are slow (let`s say... two sales a day, averaging $50 each), and you start changing your pricing as a market experiment... it will take several months to see if your sales increase to a level that you are still making a profit.On the other hand, if your sales are frequent and profits are mild, a change in pricing or pricing structure may be more quickly realized and measured. This means the more turn over of product, the more room the owner has to play around with pricing. And one more thing... with a product turn around of (as the example above) 2 items per day, the evidence for effective pricing changes would take months to realize.Also, in many cases, business owners are getting their products from a manufacturer. The manufacturer sets the wholesale price and if you`re lucky you might get a break at a specific quantity purchase. But for many small business owners, the quantity of product being purchased at wholesale prices is the maximum they can afford. That doesn`t leave much room for pricing strategy. I know I am happy for two things in my business...1. the rate of wholesale pricing, with the cost of container shipping and all that is really quite good. I have managed to form a relationship with another business owner which allows me to share container space. That means I don`t have to fill an entire container of product. And I am not the person filling out all the paperwork for customs... although I do chip in a bit of cash for their hours of work to do so. You see, I only have storage available for almost one third of a container.2. I have access to a few reliable artisans which don`t constantly change their pricing. And a few of them enjoy producing the same product each year!When importing goods (not drop shipping) the costs sky rocket. The benefit is that I have less competition so long as I find product that isn`t being drop shipped. Once a product of mine becomes a drop ship item (it`s happened a couple of times) I typically `drop` that item from my inventory as quickly as possible. Usually by selling the item at wholesale. There is only a couple rare situations when I am able to compete with drop shippers. And in those situations, I hold the product because it slowly sells, even though I am not making more than a couple of dollars per sale.I guess I hold onto the item because my customers expect to see it there. I hope they might come for that product and continue viewing the other products I offer. Maybe I will get additional sales in the long run.CookieMonster... I love your comments. They always hold valuable knowledge.

bert

Good points Vincent.  Pricing for most businesses is the hardest thing to do right and the easiest thing to do wrong.  Increasing prices goes straight to the bottom line as long as you have space to do it without losing too many customers.  The trick is starting out at the right price.  This is the failure of so many start up businesses.  When one starts out with the lowest price in the industry, they will fight that decision for the rest of the time they are in business.  Sometimes not very long.  Products sell because customers want them, the price should always come second.  Do not sell on price alone or even at all, if possible.  Lessons I have learned the hard way... bert2007-6-14 15:2:46

bert

Well said!  When ever I think of pricing I think of diamonds.  Some person did exactly what you said a long time ago and now everyone (at least about 50% of us) thinks that hard clear useless little rock is more valuable than food and most other real necessities...

InactiveMember

I want to thank everyone for the brilliant contributions to this thread!

bert

Just remember that the amount determined by your method is how much value each item sold created to get them to the point where the buyer said the price was O.K. and a sale happened. The more value one can create the higher the price one can receive, at least to a point.  Like you say, I would be a little concerned about using eBay for pricing unless eBay is your market.  This is because the price of the item may be unique to a single sale and not the sale of muliple items on a regular basis.bert2007-6-18 18:40:9

InactiveMember

One important pricing issue, especially on eBay, is the effect of arbitrage. I don`t mean arbitrage in a purely classical sense, although there certainly is a lot of that on eBay. If you have a set of prices, you have to be careful that your lowest price does not encourage arbitrage... where the customer compares the prices between items that are "the same" because of perception. For Example: A lot of restaurant menus are prepared in a very tactical manner, without much thought to pricing strategy. These menus tend to encourage arbitrage. So if you have three salads, the customer is likely to regard the salads as "salads" rather than "salad A, salad B, and salad C." This might encourage the customer to order the lowest priced salad. Good pricing strategy creates a menu that encourages customers to order the highest margin items, regardless of price.Having too many choices on a menu might seem sensible... because it attempts to offer something that appeals to everyone. And it is sensible as long as prices have been set with careful thought about the overall strategy. Cost-based pricing, the common model of cost + profit = price, leads to arbitraging at every single turn, and using this model actually removes your ability to price strategically. Price-based costing is much more effective. Want to sell inexpensive original artwork? Figure out the price first and then source the materials.
CookieMonster2007-6-18 19:2:38

InactiveMember

Definition of arbitrage for those who are interested. 

bert

Very interesting points CM and Craig!  I will be the first to admit, I hate setting and evaluating pricing.  And I am not sure if I am any kind of expert on the subject even though I go though it constantly.  Pricing is tough.  There is always a fear that you will price yourself out of the market.  It is usually unfounded if you can show the value in your product but none of us believe it.   I have never regretted raising prices accept once in my 23 years in business, regardless how painful it was at the time.  I will say most entrepreneurs I have met over the years have undervalued what they do.  That includes when I look in the mirror.

bert

Sounds like a triangle I once learned about...

iouone2

CraigL... "Does water or air create value? Or is it
the necessity to survive (alive) that creates the value?"You make a perfect point here. Water. People used to drink from their taps (the faucet)... I still do... but many wouldn`t think of it. They would rather buy a $1 water bottle. They say it tastes better. My taste buds must be broken... I don`t notice the difference in nearly every "taste test" I have taken.Then there`s the air... They have oxygen bars now too.So, is it quite possible that the value comes from something more than survival. It is possible the value comes from the impression of getting something more than the person next to you is getting?Does anyone want to buy a water filtration system for their home? The water tastes soooo much better from the filter!

vwebworld

Perception - an important factor in pricing too.
The perception is that an item that has a higher price has a higher value or quality.
~Roland

bert

Good point.  It is maybe even more than Value, by definition.  Remember the clear rocks?  In fact, I am not sure if the definition of Value and Perception isn`t in many ways one in the same as we are thinking about this subject.  I have also found luck and the courage to make changes are big factors too.

bmd2k1

I`m considerably late to this particular topic - but I`m hoping you guys are still around and can provide some insight into pricing as it pertains to an internet only service. (an on-demand application)
-Brian

Mrbusiness

Interesting