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The value of something, and therefore the price we’re prepared to pay for it, is in the mind’s eye. I thought about this as I happily paid my $4.50 for trim Latte at Gotham last week. Back at the office I offered my next guest a coffee, tea (all kinds) or juice. “Water will be fine, thanks” was the response.

Why is it that we choose to pay for something when we’re expected to do it (a $4.50 coffee), yet are happy to forego the coffee when we can have it for free?

Recently I considered a webinar priced at $250. Is $250 too much for an online webinar? Certainly not if we’re told that the
normal price is $850 but that $250 is a limited time offer. Yes, I thought, I’ll be in for that one because I’ll save $600. Am I conning myself or is this genuine value for money?

The price of a product or service is a marketing issue as much as it’s an economic one, because it’s tied into the package of value and integral to building perceptions.

I recently joined an advisory board tasked with mapping out the launch of a new therapeutic product. At this point the device is in the latter stages of design development and considerations of marketing, distribution and price are on the table.

This week’s discussion turned to brand positioning and the question of product price. Often such discussions orientate towards number crunching the known and likely costs, and income from product sales into cash flow forecasts. This of course is obviously an important step because there’s no point in contemplating a new product unless it seems viable, at least on paper.

But is that the only or primary thing to consider? Emphatically no.  Pricing is an integral part of the development of brand positioning and the marketing effort that will support sales.

In my advisory board meeting the discussion inevitably turned to individual opinion along the lines of “I’d be prepared to pay $150 for it” or “I think there’s a market that would pay at least twice that.”

With this there appears to be little science in determining price. However, whilst settling on the best price has a certain amount of ‘stick the wet finger in the air’ about it, there are some useful guidelines to follow. This method builds a view on price through a process of elimination.

Here are 5 key considerations:

1. Determine the brand story and positioning

Among other things, this will determine where your brand should fit within your matrix. For example, your planning might have determined that your brand fits on a matrix of UTILITARIAN v ASPIRATION (perceived benefit) and LOW v HIGH (perceived value). Where within these axis does your brand fit and what pricing decision come from this? In the case of our therapeutic product, big ticks go into the HIGH and ASPIRATIONAL boxes.

2. Work out where your brand fits, verses competing brands

If your brand is so new and unique that you get to set a price precedent for the category; congratulations. But even then there will inevitably be other brands to provide some comparison. In the case of our therapeutic product, it has some serious functional advantages against a raft of low priced (low value) pretenders. Therefore, in this case, it will be an advantage to differentiate the brand away from the existing offerings through a price that is clearly higher. A higher price for this product is part of a deliberate strategy to create a high value proposition. In other cases, you might decide that you want to fit within an existing range, or differentiate the brand on a lower price in the market.

3. Do your research

Make sure you understand the pricing of the competition within the category, and the pricing trends and lessons. There are also tried and tested methods of testing price tolerances using professional research methods, for example, discussions in focus groups. A word of caution here because a purchase decision is invariable a non-rational one, but most research techniques struggle to avoid respondents offering rational responses. As an example, in the early days of iPad marketing, some media research suggested that the price was far too high for most consumers; however the marketing and sales processes exposed little resistance from large numbers of determined adopters.

4. Price to make the business work

Pricing can be packaged in many ways. The above assumes a simple unit price, but of course product and service ranges are common within one brand. Also, pricing may take into account an average price where, for example, discounting or philanthropic giving is part of the marketing strategy. Above all, there is no point in pricing a brand so cheaply that you can’t make a margin, even with spectacular notions about the volumes you might attain.

5. Use your intuition

If you’ve applied the above thinking to narrow down a likely price band that should be profitable and enhance the value perception of your brand, you are left with one thing – make a considered decision.

Once you’ve set the price at launch, you are of course free to adjust the price later through the monitoring of sales and responses. A word of caution though. Product resistance or acceptance might not be to do with the price at all, so be careful in your assessment. A price clearly set too low at launch might suffer from a subsequent price rise simply because you’ve already set the price perception as low. Conversely, a price set too high might have eliminated itself from the market, even if the price is reduced later.  

So I was happy to pay my $4.50 for trim Latte at Gotham. If they’d asked for $6.50 I’d know I could get a comparable coffee next door for less. On the other hand, if the price was suddenly $1.50, I might think there was something wrong with the coffee.

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How to put a price on a product or service

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