INTRO currently we are blogging our way through the startup phase which is the second step in the Steps To Success series on what you need to do for starting up a successful sustainable new business. The startup phase assumes you completed the feasibility analysis step one and you know how much money you need for this venture, have funding in place and have decided to take the leap forward! You might want to review the Feasibility blogs which are linked at the end of this article and for your reference and review, also there is a complete list of referral links at the end of this article for the whole series.
How To Price A Product
The three P’s of marketing are product, program and pricing. Pricing is a huge subject and the following is a starting point for your price point strategy. The two concerns of pricing are maximizing profitability and increasing sales. Yes they tend to work against each other.
Price Strategy – Is your company/product a variation on a theme? Disruptive? Or innovative? These are key considerations for your pricing strategy. I strongly recommend you refer to my previous blog of “Distribution, which big wave to catch?” which is a thorough discussion on competitive, disruptive, and innovative product entries and will help you in this process.
Your company and product position plays a key role here as well. Are you a high end luxury company, a middle market player or a volume discount player??? Your company/ product identity determines your market position and everything flows from there.
Financial View – Your first consideration is to be profitable, no profits no business! The general rule for establishing a retail price is four times your COG (cost of goods). Every company has their own formula for this and you need to develop yours. Please note this can vary dramatically depending on the business sector you are in. This formula gives you a 50% GPM (gross profit margin) and your retailer a 50% GPM as well.
Retail Price Point – Is an extremely difficult task! Much of your success rides on this endeavor! Get it right the first time! The consequences are Severe! In essence this describes your company’s identity, market position and your knowledge of this product arena. After looking at a package on the shelf or online what is the first thing you want to know? What’s the price! This tells you an awful lot about the company, its product and is a key consideration in your buying decision process. Additionally all price points and margins originate from the retail price point.
Do not over play your hand or undercut yourself because price changes are extremely painful and difficult to effect and can have a huge effect on your company’s image, pricing integrity and can disrupt your distribution channels.
Retail Price Point – So 4 X the cost = $63.27, have you ever seen a price of $63.27? NO, me either. The next step is to adjust to the nearest acceptable price point up or down. You have several choices of $59.99, $62.99, $64.99, $67.99 and $69.99. My preference would be $59.99 or $69.99 depending on the market and competitive conditions. My counsel is to always end in a 9 never a 1 through 8, it is a psychological point which we do not have time to discuss here.
Price Levels –The first thing that comes to mind for new business people are volume discounts. The more you buy the lower price. This makes sense but it does not work that way. There are different tiers in the class of trade distribution channels hierarchy which require certain standard margins to cover their operating costs and profits ;and they will not purchase your product unless they are met! However you should have discount levels within those brackets of trade.
Generally speaking everything works from the retail price point. Example small dealers usually are retail less 40%, national chains are 50% off and wholesale distributors are 60% off (giving them a margin of 20% between the 40 and the 60). Although these are typical margins for the retail industry, margins vary dramatically from industry to industry.
Pricing a Competitive Product– Products that are variations on a theme should have at least a 20% plus price differential. Generally speaking people won’t move for less than a 20% difference in price.
Price Adjustments – Should be done very carefully, with much thought and infrequently. Usually done prior our post the selling season or on an annual basis and in extreme cases as a reaction to competitor or market forces. Be aware of the collateral issues of price protection, market place and distribution issues.
MSRP, Street and MAP. MSRP stands for manufacturer’s suggested retail price otherwise known as the “retail” and is the highest price point for your product. Street price is usually what it is selling for. MAP is the manufactures advertised price which is the lowest price this product can be advertised for when the manufacturing is paying for or contributing to the advertising cost. An example would be, the MSRP is $9.99, the street price is $9.49 with the MAP set at $9.29 advertised. There are Federal laws regarding price controls and I strongly recommend you review them.
Website Pricing– If you are marketing online only and never intend to have other channels of distribution for your product or service this makes everything simple and you can pretty much do what you want as events dictate. However if you have additional channels or are thinking of other sources of distribution, pricing integrity is imperative. Why would anybody want to sell your product if you are selling it lower online? It is always best to maintain the standard high MSRP on your website for this online business so as not to disrupt your other channels of distribution. It is also highly recommended that you have a” where to buy list” for your channels of distribution.
Price Integrity –Is key to maintaining profitability company image and stability in the marketplace. Keep in mind if you give one person a price break everybody finds out sooner or later . Always sooner than you think! The problem here is once you lower the price for someone it becomes the new base price for everyone! And affects all classes of trade and pricing levels! The downside of this is you are subject to price protection (giving money back) lower margins and disgruntled customers. Pricing is a very delicate issue! This is why it is critical to get your price right the first time out with minimal price changes to maintain your company’s pricing integrity. Bear in mind your pricing levels are all connected and move in unison! So everyone’s price changes!
What’s the market price? A thorough product, competitive and price analysis must be done. I suggest you look at the size of your competitors and how dominant they are in your product category.
Who’s buying and where? Knowing your market, audience and customer is vital! Make sure you explore this thoroughly. Also where do people traditionally by this category of products?
Pricing is the life blood of your business and must be constantly monitored and analyzed. This has a dramatic effect on your business profits, market position in the marketplace and your company’s growth!
Wishing you Luck and Success in your new business venture,
DISTRIBUTION, which Big Wave to Catch? This blog covers the three types of new product entries, competitive (variation on a thing), disruptive and innovative. And also opens up an excellent conversation on distribution. > FULL ARTICLE
STEPS TO SUCCESS SERIES
Greetings and welcome to the BizBuzzNYC Steps to Success Series! A must read for startup entrepreneurs and new businesses, consisting of thinking points (steps) in a check list format for a quick read and later review. Presented in a logical sequence of events. Most of us reading this article have entrepreneurial skills and a keen eye for product, but what about the rest? This series is about basics, all of the basics which are the necessary foundation for your new successful and sustainable business. In essence, we are attempting to review the elements that most entrepreneurial startups and new businesses frequently miss, are unaware of, avoid or skip over. For a great overview read > FULL ARTICLE
FEASIBILITY, how to start a business!>FULL ARTICLE
- PROJECT CHECKLIST for Going Viral!! >FULL ARTICLE
- DISTRIBUTION, which Big Wave to Catch? >FULL ARTICLE
- CAPITALIZATION, how much money do I really need ? >FULL ARTICLE
- DECISION, to be or not to be, that is your Question! > FULL ARTICLE
Business Startup >FULL ARTICLE
- Business Plan > FULL ARTICLE
- 1-2-3 Go! MUST DO FIRST! >FULL ARTICLE
- 4-5-6-, The Marketing Shtick ! >FULL ARTICLE
- How To Price A Product.
13 MUST ITEMS TO REVIEW BEFORE YOU PRICE!!
- Price Strategy
- Retail Price point
- Financial View
- Retail Price Point
- Retail Price Point
- Price Levels
- Pricing a Competitive Product
- Price Adjustments
- MSRP, Street and MAP
- Website Pricing
- Price Integrity
- What’s the market price?
- Who’s buying and where?
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