The ‘Right’ price for your shovel, (or) what has ethics got to do with it?

Remember this old post where we had written about The right price for your products?

Taking it forward from there, we would like to bring to you this post from HBR.

After a Blizzard, what’s a fair price for a shovel?

We discussed, and what follows was the quick post one of us wrote, and in fact insisted upon over email.

Haha..simple, pricing objective needs to be clear….it is not just about one season profit.

Also if we are assuming that the shopkeeper will gather inventory before the start of winter, then why won’t the consumers do the necessary preparation for the season and buy shovels and other necessities?

….now, there could be some lazy bones like me who will start digging a well when they are thirsty…also, there could be some instance where shovels will break…now, if a shopkeeper wants to squeeze money from those cases in point, it is absolutely fine, if the pricing objective is being met.

i.e if my business (my shop’s sales) is unpredictable and I am not sure about sustainability till/ during next season, and I am really in a cash crunch situation, I would milk the cow by increasing the price……think if I don’t have this unpredictable  cash crunch situation, but I increase the price, what will happen if rest of the season (even next year season) is normal winter – I will lose customer loyalty………………………………..

NOW, OF COURSE if it is not about me, but we all lobby and increase the price at once (and there is not a game theory defaulter), enjoy the profits (you may never enjoy this in future, as consumers would be extra cautious (prepared in advance) from next time onward – But not all; humans are humans) 

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”