| The Price is Right |
The Price is Right (Maybe)By Art Ilano
Art Ilano is a business professor at the University of the Philippines. He is also a management consultant and is the Editor-In-Chief of SME Insight magazine. For the full article, read the January-February 2007 issue of SME Insight, the magazine for small and medium enterprises
Pricing one’s product or service is often a stumper. Are we pricing too high? Are we pricing too low? Set a price and this will often result to pricing anxieties.
Here, then, is a crash course in pricing that, hopefully, can bring about a bit of much-needed peace of mind, at least when it comes to matters of price setting.
In the beginning…
How can a buyer tell whether a product is cheap or expensive? Unless we’re talking educated buyer here, who can pick apart a product (say, a ballpoint pen) into its components and estimate costs of production, the only way that your average consumer can discern whether a product is expensive or not is by comparing it with something else.
Now go back in time and imagine the days when the first ballpoint pens hit the consumer market (this will be in the 1940s, when the Reynolds’ Rocket pen hit the stands). Nobody has seen a ballpoint pen before, and therefore there was no clear idea as to how much it should cost.
Ballpoint pens were initially priced at US$ 12.50 each which, in the 1940s, was an astronomical sum. But people bought at this price because of the product’s promise of quick-drying ink (versus fountain pens that had to air-dry) and a more stable writing performance.
Did the buyers think it was cheap or expensive? The only basis of comparison would have been the pricy fountain pens that were typically used back then. And since at US$12.50, the ballpoints were practically priced at par with fountain pens, then the market thought that it was a pretty good deal. Early ballpoint pens, after all, felt like fountain pens as well, with solid finishes and metal trim.
In the mid-1950s, Parker would mass-produce its Jotter for half the price, with the promise of more reliable writing and of lasting fives times longer. This product was a resounding success.
And by 1960, BiC would sell mass-produced plastic ballpoints at just 60 cents each. Wow.
If you’re the first to market a new kind of product, the temptation is for you to price via markup. Give yourself a healthy five hundred percent markup and nobody will bat an eye, because nobody knows any better. You developed the product anyway, so you deserve it. Besides, you can always justify the high margins by saying you need to recover your research and development expenses!
On second thought…
This is the traditional dynamic that happens in many emerging industries: First, the first-mover launches a product at a very high margin (because he thinks he deserves it); and second, an enterprising challenger emerges to take advantage of the overpricing behavior of the first-mover.
Incidentally, a variation to this theme is the enterprising challenger who utters the phrase: “I can make this better.” This is how General Motors eventually took away the market leadership of the cheaply-made Ford automobiles, for instance, in the early 20th century.
The moral of the story is this: You price your product high, and you’re bound to have a price challenger. Price your product low, and you’re bound to have a quality challenger.
Revolutionary products, however, won’t have a basis that consumers can grab hold of, so they use the next best thing: substitutes.
And if there are no clear substitutes? Like when the first photocopier came out, or the first television set? Then you can get away with astronomical margins because your buyers won’t know any better.
How to price low
Ever had the experience of looking at a product’s price and saying “It’s too cheap. It must be inferior?”
Many product managers make the mistake of pricing too low, perhaps out of desperation, or perhaps out of a sense of insecurity about their products.
The problem is that the market senses too-low prices as a sign of weakness (or yes, desperation too). Price too low and you become typecast as a cheap, inferior good.
The sad fact is that pricing too low almost never works as a sustainable strategy, except perhaps if the economy is in a permanent recession. First of all, the market ends up distrusting your product. And second, your business becomes prone to financial woes since you are essentially starving yourself.
How to price high
If you want to compete using a premium product, however, then note that product quality, features and packaging become very important. Without the sensory cues about your product’s superiority (no matter how artificial it may be), then your product will simply come across as being overpriced.
A strong brand identity also counts. Premium strategists invest in their brand value, taking pains to ensure the integrity of the brand by way of stringent guidelines on the use of the brand as well as all materials involved in conveying the brand.
Strangely enough, pricing a product higher can actually help increase sales, particulary in the case of so-called “me” products, or products that are bought to express one’s self.
Classic case: a product called Fleischmann’s Gin was dying in the market, where it was sold at US$ 4.50 per 750ml bottle. When the manufacturers RAISED their prices by 50 cents, however, a funny thing happened—sales actually rose!
These are just some of the basics that you may want to keep in mind when pricing your product or service. It is by no means comprehensive, but at least it’s a start. And perhaps the biggest lesson you can take home from all this is that, let’s face it, pricing is all in the mind. |
