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The Price is Right – Now Choose your Cost

Entrepreneurs often waste valuable time pondering the price of their products or, worse, how to price them. The trouble is that no matter how much they try to fight it, they never have control over how much consumers are willing to pay.

In 1983, Apple rolled out the Lisa computer, boasting that it would dominate the computing landscape of the day and drive IBM out of business. The computer was given the retail price of $9,995 (almost $24,000 by today’s standard), and the failure of this machine was one of the biggest in the company’s history. Apple tried to set the price of its equipment, and the public disagreed.

That’s because price-setting is a myth.

Price

Ultimately, you can’t set the market price of your products. Only your customers can do that. Theirs is the only price that matters. As an entrepreneur, all you can do is figure out how much consumers will pay for the product and whether you can build it at a cost that’s worth the effort. If you demand too much, you won’t sell enough, and if you demand too little, you won’t make a profit.

3 Tips to Make Product Pricing Successful

In the end, you have no control over your product’s market value. The number on the sticker is either right for your customers or will cause failure for your business. This is why successful companies do market analyses, utilize product pre-releases, and use focus groups. They’re figuring out what the price is rather than what they wish it would be.

Try these three tips for successful pricing:

1. Forget About Cost-Plus Pricing

In the case of the Lisa computer, Apple’s executives likely chose the $9,995 tag to cover the $50 million cost to develop it. Because they didn’t consider the product’s inherent worth in the planning stages, they were left with a massive bill they couldn’t repay. Any product can be sold at any time if its real price is figured out, and it’s good business only if the right costs are chosen to match.

2. Keep Your Price Accessible

Mulberry, the luxury leather brand, was bleeding revenue until the company lowered the prices of its handbags to make them more accessible to its customer base. Despite receiving less profit per bag, the company’s retail sales as a whole have rebounded.

As a rookie entrepreneur, your potential customers aren’t familiar with your name or your product, so it’s even more critical that your prices are accessible. Use the market as your guide, and set your price points to be competitive with the big names.

Fruit price tags

photo credit: LukeBlacks / Flickr

3. Price Differently

Amazon’s Fire phone was a commercial flop for a number of reasons. Despite pricing the device to match competitors, such as the iPhone or Android phones, Amazon’s limited availability and partnerships meant that it had less to offer for the same dollar amount. Instead of following its own winning strategy of undercutting the competition in pricing, it crumbled under the pressure.

If your product is completely new and you don’t have major competitors, you’re in pretty good shape. However, if existing products threaten your market share, it’s best to try filling a price gap in the market. Look for a price point that’s currently unavailable to customers. If you can make a product that both fits into that space and meets the consumer demand at that price point, go for it.

Once you know the price, you do have some control over profit. Choose costs that can still net a profit without lowering quality or failing to meet expectations. This may include tweaking the product itself but shouldn’t involve changing the price.

It’s time to stop setting prices based on your product’s cost. That’s a recipe for disaster. Instead, you should first ask what customers will pay for it. Can you keep costs low enough to make it worth your while? If the answer is “yes,” you’re in business.

About author

Per Bylund
Per Bylund 1 posts

Per Bylund is Assistant Professor of Entrepreneurship and Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. His areas of research are entrepreneurship, management, and economic organization.

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  • Bertie

    Very interesting post, but however, I think it’s only valid for mass-produced items, which admitedly make for most of the market. But, what pricing strategy would be right for highly customized, one-off products or services, like say, an IT consultancy? That’s a very specific market, as every project is different and a proposal must be prepared beforehand. It’s almost impossible to do market research due to the myriad of different IT ecosystems, each one with its own peculiarities. Some companies bill by the hour, but this approach doesn’t quite work, as individual productivity is highly variable, and unforeseen technical glitches add to the hour count, upsetting customers. This is a topic that I would like to see addressed, as we’re moving more and more to a shared/distributed/gig economy with an increasing differentiation in offer.

  • Martin,

    The sky’s the limit – even a potato can makes a creative entrepreneur five figure income in just 2 months! https://finance.yahoo.com/video/mr-postman-potato-letter-bag-034457710.html

  • Thought provoking post! I often say that the price is always right on the market, and then it is up to the customer to vote with his or her wallet.