What is the Right Price for my product/ service?

“In spirit, pricing should ensure that you will survive”

There are multiple internal and external factors that need to be considered, and there is an important need to identify the pricing objective, before actually getting into finding the price.

Start asking yourself – What is my product/ service positioning (luxury product at low price could actually impact your image)? How will changes in price impact demand for my product/ service (do some market research)? How much are the COGS and the Fixed Overheads related to my product/ service (Gross margin should be sufficient to cover overheads)? What are other external factors that can impact my pricing (such as regulatory compliances, competition etc)?

Once the above stated questions are asked, identify the pricing objective – Short-term Profit Improvement (cash crunch situation), Short-term Revenue Improvement (expanding the market share now, and reaping the benefits in future through economies of scale and scope), Profit Margin Improvement (Low/ unpredictable Sales situation), Quantity Improvement (creating a future demand by making masses habitual to product/ service now || also, take advantage of economies of scale in future), Differentiation Creation (Low/ High Price Product/ Service), SURVIVAL (Intense competition).

As you know what exactly you want to achieve, now, choose the appropriate model (Cost-plus: Price equal to Cost plus Margin, Return Based: Price proportional to the ROI created for customer, Target Return: Price set to achieve target ROI, Perception Based: Price set at a level which is perceived as “fair price”).

“Remember, your price should always be higher than your cost, never be higher than market perception of “fair price”, and most importantly, definitely be enough higher to cover cost of normal variations in sales volume”

Advertisements

2 thoughts on “What is the Right Price for my product/ service?

  1. In the world of professional services, there is talk about AFA and moving away from the billable hour (perish the thought!). I think while one thinks and talks about the external factors that drive pricing strategy, one needs to balance a variety of out of control, in control, and “somewhat in control” factors. The industry experts are crying out for the need to overhaul the billable hour which promotes inefficiency but that is affected by internal and in control (pricing methods of cost plus, etc.), external and out of control (my mature org vs. the cash hungry start up), and external somewhat in control (conversations about value for the fair price) factors.

    Some of these clearly overlap (my conversation re: value for fair price in context of the discounted rate the start up is quoting) and are not as easy and objective to decide upon as they may first seem.

    Thinking about these leads me to another question – when should (and not can) we say “no” and walk away? A topic for another post and another discussion perhaps?

  2. Pingback: The ‘Right’ price for your shovel, (or) what has ethics got to do with it? | Virtual Ruby

Agree? Don't Agree? Why? Let's hear from you...

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s