A good product is built on a solid foundation – from idea to execution, technology to development. Product pricing is an often overlooked aspect, and most likely not one of the primary factors for a newly coined business. However, while this may not be the first thought during product creation, this becomes one of the most important decisions when it comes to taking a product live. This article tells you why, and how you should go about choosing the right price for your product.

Why is it important to make sure you charge the right price

In any business setup, there are two primary aspects from a customer’s point of view – the price and he quality. If you offer great quality, but at a steep rice, they will choose an alternative solution, or go to your competitor. From a business owner’s purview – there are again two important parts – the price, and whether they can break even from the sale.

Another important aspect of pricing is the match between product image and product positioning. While deciding the price, it is very important to consider the brand image you want to portray and the market segment you are targeting. Say you are starting a hotel. If you want to target the mid market segment, you have to ensure good quantity at an affordable price. However, if your ambition is to set up a 5-star hotel, and you still offer high quantity at affordable rates with a mediocre ambience, you will not be considered as part of the high-end segment.

The last but not the least of it all is how the price fits into the overall strategy and objectives of your business plan. Does the price decided enable you to support organization goals? Will you be able to generate good income to cover the costs? Will you be able to make enough to garner a healthy profit? Are you looking for immediate gains or long term gains? In a nutshell, the final market price of a product can make or break your product.

How to choose the right price?

The price of a product is more than just calculating costs and adding a markup. Put together a pricing strategy that meets your requirements and budget. Here are some simple rules to consider:

• Charge more than what it costs to make the product, covering all base costs, add ons, services, employee salaries, office space, furniture etc.
• Be clear about your buyer persona. What does your target segment want? How big a problem are you addressing? What do they gain from your solution? Will they get good value for their money?
• Focus on your differentiators : The first step is to identify what it is that you offer that others do not offer, and what you offer better than others.
• Price elasticity: Identify what impact a price change would have on your product. The ideal scenario should allow you to just make enough to break even, even if the set price needs to be reduced.

Let’s look at some viable pricing strategies.

• Slab based pricing – Are you going to cater to different market segments – a start-up, a mid-size and an enterprise model? If yes, you can have a basic, medium and a premium version to start with. Called the anchoring model, this plan basically assigns prices based on plan tiers – Customers who can afford a higher plan get a little bit more.
• Consider A/B testing. Have two scenarios at two different prices and see how it works. If the higher priced scenario is doing as good as, or better than the lower setup, you have your answer there.
• Competitive Pricing: Do a competitor research and price your product based on the features and depth of your offerings. You can plunge just a bit lower (Price Skimming) to give your product a push at the start, or tip it a bit higher (Penetration Pricing) to indicate a better quality or an innovative idea.
• Pricing balanced with features/benefits : You can price your product lower, but provide attractive benefits in the form of coupons, discounts and other offers to increase traffic in a short time. However, transitioning from there to a market-even price is important to ensure your product is not considered cheap.
• Bundle pricing : You can offer packaged services or multiple products together at lesser cost than their individual. The customer pays less for both services together, while you end up making double the sale for a smaller profit on each item; a win-win for both sides.
• Anchor Pricing: Use a comparative pricing strategy – list an original price and a discount price. The comparative pricing evokes the anchor cognitive bias, leading the customer to make a decision based on the reference, in this case the original price.

The end goal of all businesses is to solve a problem, while making a healthy profit. Being too greedy or too shy will not serve the purpose. Let’s aim to hit the right note and achieve the economies of scale.