These two young entrepreneurs feature in a Volkswagon commercial – they adjust the price of their lemonade from 25c to $1, as they watch the fancy new Volkswagon Passat stop at their lemonade stand. This wasn’t the main point of the commercial – it was all to do with the car – but the two young vendors absolutely nailed one of the important principles around pricing – charge what the market can handle.
When we first started manufacturing new products, one pricing theory was this – charge at least three times your cost. Well, that would give you a decent margin, and I would suggest that if you can’t get this kind of margin, then you need to be looking at your costs, or maybe the project as a whole, because it may not be viable. However, the point is that it’s not you that is going to decide what the best price is for your product – its your customers!
Most of us just pull figures out of the air – does this sound too high? or too low? and interestingly enough, we often price our products too low.
When we were first marketing and starting to sell a prawn trap hauler, we initially set a retail price of $599. It wasn’t selling much at all, until one day at a tradeshow, we overheard a fisherman say ” Can’t be that sturdy for that price “. There was nothing wrong with the quality of the product at all , and there were decent margins at $599, but the perception was that the product was too cheap, and therefore must be no good. We upped the price to $999, and sales quickly increased.
Our Three Top Things to Consider When Pricing Your Product
- Is Your Product a Luxury or Specialised Item?
Economic theory tells us that price varies with supply and demand….unless the product in question is a luxury item. So if you are selling a product that’s custom made, leather handbags for example, they should be much higher in price that their factory, mass produced equivalent. The price should reflect what they are – a one of a kind item.
- Who is your Ideal Customer ?
Having a really good detailed idea of your ideal customer will also help in your pricing decision. Are they affluent single professional people? Or seniors on a fixed income? I can use the same example of our prawn trap haulers here too – our ideal customer was a sports fisherman with his own boat – this is an expensive hobby, so that points to our ideal customer having a fair bit of disposable income for leisure activities.
- Where will you sell your Product?
It stands to reason that people would expect to pay more for items in a boutique fashion shop, than the discount chain in the mall, doesn’t it? So price your products accordingly. Walmart won’t even stock items over a certain price – their motto is ‘pile em high and sell em cheap’ . If you are planning on getting your product into retail stores – check their pricing policy, research the types of product they regularly stock.
I was recently shopping in a gourmet food store, and I spotted a fancy package of Holy Crap cereal – you may have seen this product showcased on Dragon’s Den – its an organic, gluten free , delicious cereal blend , and costs around $15 for a smallish bag. I bought it – I was buying gourmet food items anyway, and that tiny package lasted for about three servings.
A week later I was running round the local supermarket and again was in the cereal section and noticed the Holy Crap cereal. This time, however it was nestled between two jumbo packages of big brand cereals. The price – $15 – compared to $5.99 for a box that was at least 10 times bigger – stood out, and not in a good way.
I bet that sales of Holy Crap are a lot higher in the gourmet food stores than they ever will be in the supermarkets.
There are obviously other variables that have to be taken into account when setting a price for your product – whether you are selling wholesale or retail, online, globally – all these will factor in, but the What, Who and Where, will always be a good start.
