Trying to decide on the “correct” price for your business’ products and services is a challenging endeavour. It is possible to ask three different kinds of questions:
1. How much will customers be willing to pay? (Customer-based pricing)
2. How much do we need to sell to make a certain amount of profit? (Cost-based pricing)
3. How much are competitors charging? (Competitor-based pricing)
Of course, the question most relevant to your product and services depends on what type of market you find yourself in. If you have a monopoly and are the only seller of super-widgets you can set what
price you like. If you find yourself in a market with a lot of competition, it will be wise to answer all three
questions and run different pricing scenarios for each.
The following three factors will help evaluate the market for product or services:
1. Competitive Analysis
When we examine our competitors, we can focus on other areas apart from the price alone. Say for
example you notice that a competitor’s price is hard to match. You also notice that they are always
out of stock and have long lead times. The market will probably take a mark-up to their price if you can
stress shorter lead times and a continuous supply.
2. Ceiling Price
Looking at a product or services ceiling price is a good way of gauging the range of prices available.
Usually, for products that have been on the market for a while, they will never hit the ceiling price
again (antiques aside). If you’re selling a product, it’s worth considering the product life-cycle as the
market will pay less when they reach maturity and then ultimately decline (as is the case with Home
3. Price Elasticity
Put simply, price elasticity is how the level of demand changes with price changes. Some goods are
deemed to be “inelastic”, such as petrol, cigarettes, and alcohol. The demand for these good does not
change in proportion to price rises (people still need to drive their car for example) and this is the main
reason why the government taxes them heavily (and their price always changes).
Trial and error (where possible) is a good way of determining the elasticity for your own products or
services. However, consumers generally do not like change. If you notice that stocks are selling out
quickly (stock turnover is high) or is sat on the virtual shelf for too long (Stock turnover is low) chances
are you need to change the price.
The Importance of Research
Once you have chosen an appropriate price level it is important that you constantly review it. The
market remains dynamic and in this modern, information age your competitors will be monitoring your
results closely. With the advent of the internet consumers are kept well informed about prices, too. This
is especially true if your products or services are exactly the same (homogenous).
Research is of vital importance as product pricing should be performed in advance of the product being
made available for sale. However, as the market is so dynamic the lead-time between research and
taking the project “live” needs to be as short as possible.