One the biggest conundrums facing businesses is how to price their product or service. In some cases, it’s a complete guessing game, while in others, companies play with pricing in order to lure customers. That’s just another way of saying they lower the price, and sacrifice margins, to secure business. In some commodity based sales it’s understood that pricing fluctuates within the market. However, some companies are better at securing a higher price in a commodity market than others.
So, what gives? How do you price your product or service? Should there only be one set price, or can it fluctuate to market trends, or even to the product’s life in the market? It depends, and that’s the best possible answer. You really need to take the time to understand what goes into pricing your product and service, and what factors influence that price. To have an understanding of these factors, we should first take the time to outline them.
A product’s useful life experiences different stages in the market:
Most companies simply don’t understand how to price their product. A product has a certain life in the market. For instance, when vinyl records first came out, there was an introduction stage, a growth stage, a leveling out stage, followed by a gradual decline stage. In some cases, it’s a drastic decline. However, do you think the price stays the same through all these stages, or does it change accordingly? The fact is, a product goes through these stages and experiences several price points where companies are able to maximize the gross profit in each individual stage. These four stages are referred to as the product life cycle management stages. Each must be managed accordingly in order to capitalize on the product’s gross profit, and to make sure your product is not under, or over, priced in the various stages. Not pricing your product accordingly will mean your company will either speed up, or slow down, the stages of your product’s life. If your price is too high, then you’ll move your product too far forward into the leveling out and possible decline phase. You might be speeding up your product’s life at a time when your competition’s product is still growing and thriving. Another way of looking at it is the following. If your price is too high, and your customers can get the same product elsewhere for less, they will. Consequently, if your pricing is too low, you’ll never achieve the benefit of either the introduction and growth stage, and likely won’t be able to invest in improving your product. In the case of having too low a price, your gross profit margins are thinner. With less profit generated, you certainly won’t be going out of your way to try and spend money improving that product. Having a stale product offering will definitely lose you business. Granted, this is all a lot to consider, but the basic principles aren’t hard to understand. To make it easier, let’s summarize these four stages.
This is where you do most of your homework. You need to identify the customer need, determine market pricing, distinguish your product’s unique offering, and price your product accordingly. However, should you just go with what the market is offering, or should you go higher depending upon your product’s unique selling points? Do you know what customers are willing to pay for your specific product?
Now you’re growing and making money, and your product’s sales continue to climb. There’s only one thing you need to be aware of. Is your price generating the sales and gross profit it should? If your product offering is better than others, and warrants a higher price, then you need to know this.
The product’s life and growth seems to be stabilizing. Growth is slower, but still consistent. The product is experiencing good returns, but you can sense that the market will become far more competitive. Are you and your product ready for what’s next?
The product is now on a steady decline. Gross profit and margins are smaller, volumes are lower and it seems like the eventual end of the product’s useful life in the market. Your competitors seem to be moving away from providing the product, and it looks like you should do the same, or should you?
In the case of the vinyl records, there was a decline and eventual end of life. The optical media industry took over and compact discs became the product of choice. Does that mean that there are no more vinyl records being made? You might be surprised to know that vinyl records are still being made today, and for those companies still making them, their gross profit and margins have never been better. Granted, this decline in the vinyl product took years to happen. Some product lines die quickly, others gradually. The companies making vinyl records kept the product line and ultimately filled an important and unique market niche. This helped distinguish themselves from their competition. When everyone abandoned the vinyl record, some companies with a good understanding of these four product life cycle stages knew something their competition didn’t.
We’ve left most of these questions unanswered on purpose. There is no simple answer to any of these questions. In the end, your product’s price depends on a number of factors, and you must be cognizant of each in every stage of the product’s life in order to generate the returns your company deserves. If you have a solid marketing department, then they’ll likely be able to provide all these answers. If not, then you might want to look into getting some outside marketing help. In the end, it will help prolong your product’s life, maximize the price, and improve your returns.
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