Where costs + branding effort = margins
The zeitgeist issue of the week is pricing strategy, and how to price products for acceptance in the market. This is an issue all my clients confront. For software clients, pricing strategy differs depending on the platform of the offering (packaged software versus downloadable media). For publishing clients, digital publishing has turned all content delivery theory on its head. And for jewelry clients, there is a constant struggle between the inherent value of the materials (gold, diamonds) and the artistry with which those materials are assembled.
In fact, pricing strategy is the bane of most entrepreneurs. It’s never just about how much things cost. It’s much more about how much added value is perceived through your offering, and the values of the buyer/company perceiving your products’ value.
Here are a few important concepts relative to pricing:
1. How you market and brand will largely determine how much you can get for your products. I know products that get 20X markup and others that struggle with 2X, and the only significant difference between the two extremes is the brand perception of the lines and the people to whom they market. Brand perception is in the presentation you make, the story it comes with, and the confidence with which you pitch the price.
2. Buyers who perceive your product is a commodity will never step up to a higher price point. The person who buys gold jewelry after looking at the day’s gold market, the car buyer who could care less about the model they purchase “as long as it runs,” and the ambivalent software buyer who believes all software is created by $1/day Chinese programmers will simply not see value in a more expensive alternative. You simply can’t change the mindset. So unless you are equipped like Wal-Mart to strip all possible costs out of your production and pay yourself and your workers nothing or next-to-nothing, don’t go after commodity buyers. It’s not worth it.
3. Buyers often purchase goods not according to their desires but according to their risk tolerance. In the case of retailers (if you are wholesaling your product), this also translates into the type of clientele they have cultivated as a result. Whatever you do, do not let the cost-conscious, risk-averse clients influence your pricing strategy. They are not capable of perceiving the product at its ideal value. Make sure that your pricing strategy is related to the proper target customer and not to the convenient customer.
4. Only reduce your asking price if you firmly believe you have pursued the ideal customer as hard as you can and that dropping your price is your only option. It’s not just a matter of whether or not you can make enough on a lower markup. The question is, do you want to run a business where you settle for just making enough. You can bring your prices down, but it is extremely different to bring them back up again. So be sure if you reduce your prices that it’s for the right reasons.
5. Which competitive products are you comparing yourself to? Be sure to compare your offering to high end comparable producers to see the relative prices. If you find you are priced higher than your high end competition, then the prices probably should be adjusted. If that is the case, then I suggest making a new price list/catalog rather than offering discounts to those who have complained you are high. This way you can explain your ability to do so by explaining that better volumes and efficiency are giving you margin benefits that you are passing along to them, but you hold your ability to sell off your price sheets without discounting. However, if you find you are priced comparably and you are experiencing price resistance, my guess is that you haven’t pursued the right clients hard enough.
Ultimately, selling and promoting are the key to having high margins; selling to the right retailers who service the right consumers and promoting your brand in such a way that your perceived value is very high. If all is well on the selling and promotion front, pricing sort of falls in line (assuming your production/acquisition costs aren’t out of control). There’s no doubt that we live in a world where we can get much of what we want for practically nothing. But the consumers you are targeting are aware that they get what they pay for. So tell them that story, and help them make choices they feel good about.