Blog Post

Answer to Question of the Day: Pricing

This post, originated as a Comment on “Question of the Day: Pricing”:http://gigaom.com/view/question-of-the-day87

_Adam says: “It’s a difficult question, with no one good answer. The bottom line is: ‘what the market will bear.'” *The challenge, of course, is determining what the market will bear.* But Adam suggests a few strategies for getting you from here to there. His response begins below._

——
First, what does your market research tell you? Do the _differences_ between yours and your competitor’s product suggest a pricing strategy? It may be hard to base your product price on their’s, but using your competitor’s as a _starting point_ might be easier than doing all the real work yourself.

From there, consider these *3 strategies*, depending on your product’s stage of life:
*1) If your product is in a beta stage,* you can do some surveys and research yourself. Find a bunch of beta testers in your target market (ideally a wide range) and have them test your product, and answer questions about pricing, usability, etc.

*2) If your product is ready to roll,* you can place a small ad with a low price in the back of a trade magazine and gauge the response. If you resize the ad and change the price over the next few issues you can gain a fairly accurate model based on ad size/location and price. (*_Don’t_* change the ad, otherwise you have too many variables. *_Do_* change the size and location since you may not have experience with typical response in that magazine.)

*3) If it’s a physical product,* it’s fairly easy to give a starting price – your margin, assuming a direct sale (no middlemen) should be between 40-60%. Go up if you expect retailers to take a big chunk, go down if you expect most sales to be direct or low overhead. You might price it higher if your customers gain a huge benefit from it, and lower if it’s practically trivial for a competitor to duplicate.

Keep in mind that *you don’t have to set your price in stone.* Pick a price, and then move up or down as needed. Down is easy with coupons, specials, sales, etc. Up is not difficult, although it may seem to be. A lot of companies overprice their product at the start (ie, choose the ideal high-profit price) and then have an “introductory deal” to gauge interest. Then it’s easy to move up (the deal expires, sold out, etc) and easy to move down (demand was so great, we’re keeping the price!)

-Adam.

2 Responses to “Answer to Question of the Day: Pricing”

  1. mikethereader

    There is a fantastic book on pricing called “The Strategy & Tactics of Pricing”. A must read for anyone involved in pricing decisions. It’s a heavy tome but well worth the investment.}

  2. walkerhamilton

    Sometimes pricing is not for the product itself. Perhaps you have a pretty cool software product. Would it be worth more to your company if you were to open source it? What if you never did release it?

    These are some things to consider if your company has some software that supplements your service or other offerings.}