For any small business, product pricing decisions can be among the most difficult. There is often a tendency to price one’s product or service low, in the hope of gaining quick sales, or through fear of rejection by the target market. However, the danger here can be that one prices the product too low. It is very difficult to raise prices afterwards, when the promoter, perhaps, begins to notice that the item is too cheap.
Five ways of pricing a product are as follows.
Cost plus Margin
Here, the promoter calculates the cost of materials, production, transportation, etc and simply adds a desired margin to arrive at the level of product pricing wanted.
Example :
Costs – € 6.00
Desired margin – 40%
Charge to customer – € 10.00
Add VAT @ 23% (if applicable) – € 12.30
What the Market will Bear
Here, the vendor carries out research into the market, pays attention to what other suppliers are paying and makes a decision based on what he or she believes the market may be willing to pay for the item.
Example :
As above, the item costs – € 6.00
Competitor A charges – € 17.99
Competitor B charges – € 19.99
Vendor decides to price his product slightly lower – € 16.99
The margin is much higher in this example.
Premium Pricing
Here, the vendor deems his product to be of a higher quality than those of the competitors and carries out research that confirms this impression in the marketplace. He seeks a market that is willing to pay extra for something special – one that will be attracted to his top quality item.
Example :
The item costs are higher, due to superior elements – € 9.00
As above, competitor A charges – € 17.99
As above, competitor B charges – € 19.99
Vendor decides to price his product higher – € 24.99
Introductory Pricing
Here, the vendor carries out all the research as above, but then decides to make a special price, perhaps for the first period of time the product is on the market, or for a specified quantity. This is clearly communicated to channel partners.
Example :
The item costs are – € 6.00
Competitor A charges – € 17.99
Competitor B charges – € 19.99
Vendor decides to price his product slightly lower – € 16.99
Vendor then offers introductory pricing of – € 12.99
The vendor communicates that this lower price will last for a certain period only, in order to generate quick orders and gain a foothold in the market.
Return on Investment Pricing
Where a large investment in equipment has been necessary and where this investment will need to be renewed periodically, there is a case for adding a little “re-investment” allowance to the price and for ring-fencing such monies.
Example :
The item costs are – € 6.00
Desired margin – 40%
Charge to customer – € 10.00
Add VAT @ 23% – € 12.30
Round to € 12.50 and retain the net-of-VAT element of the 20 cent extra (16.2 cent) for repayment of investment outlays.
Product Pricing in Context
In the real world, no promoter’s product pricing policy can exist in a vacuum. It needs to be related to the quality on offer, market trends and is, of course, subject to negotiations with channel partners. Indeed, the channel partners with which one works also reflect upon the appropriateness of the pricing. Product pricing needs to be backed up by accurate branding messages – messages that the product or service in question lives up to.