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Pricing Your Product for Maximum Profit - Part 1

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This is part 1 of a series of 6 articles that will guide you towards deciding on a price for your products that will give you maximum profit.  Bear in mind that in marketing terms, a product can be both tangible and intangible.  In other words, you can see, feel and touch it as well as it being a service.

In this series of articles you will learn:

  1. The single most important thing to consider when pricing your product or service.
  2. Four pricing myths that are hurting your business.
  3. How to test your price point.
  4. The vital six questions you must ask when determining your price.
  5. Six techniques for presenting your price (i.e. How to get your prospects to happily pay your super high prices).
  6. Once and for all:  do you use .99, .97, or .95 to round off your price?
  7. Six price gimmicks that get customers to throw open their wallets.
  8. Four ways to discount your product successfully.
  9. Ten ways to increase your prices without your customer knowing it.
  10. The Just-Don’t-Do-It rule of pricing.

 Table of Contents

  1. THE FOUR P'S OF MARKETING
  2. WHAT IS YOUR OBJECTIVE?
  3. PRICING MYTHS EXPOSED
  4. PRICE IS A PERCEPTION OF VALUE
  5. TESTING PRICE POINTS
  6. TEETER POINT AND THE SIX QUESTIONS
  7. PRESENTING YOUR PRICE
  8. PRICING RULES FOR ROUNDING OFF
  9. ADVERTISE YOUR PRICE?
  10. PRICE GIMMICKS THAT WORK
  11. SUCCESSFUL DISCOUNTING STRATEGIES
  12. 10 STEALTH WAYS TO INCREASE YOUR PRICE
  13. NEVER COMPETE ON PRICE
  14. CONCLUSION

Often the difference between a winning product and one in second place is how you price it.  Sales tests have shown that price is one of the most compelling factors that determine the success of a sale.  Readership surveys have shown that readers looking at an advertisement will often go to the bottom of the ad to find out the price first. 

1.    The Four P's of Marketing

The following four elements of marketing make up what is known as The Marketing Mix – the 4 P’s – and together they determine the success of your product or service. 

A business person using the mix can be compared to a chef using a recipe. You use it as a guide and then adapt it to suit yourself.  Neil Borden developed the term in 1948 when he wrote the article “The Concept of The Marketing Mix” after he learned it from James Culliton.  It describes the marketing manager as the “mixer of ingredients”.

When deciding a strategy for a profitable business you should ask yourself four critical questions as a result of the Four P’s. . . . . . .

  1. How do I develop or improve my product?
  2. What is my route to the market?
  3. How do I tell people about it?
  4. How much should I charge for it?

The first three questions all have a cost associated with them.  Only the fourth question actually determines how much money you will bring in.  So pricing is a critical question that should be considered carefully.

But it gets more complicated than this: Price is a perception of value – it doesn’t have to be the actual value of the product. The customer has to feel that the perceived value of the product exceeds the price he is asked to pay. Pricing is a very delicate balancing act between over-charging and losing customers, and under charging and ‘leaving money on the table’. What if your calculations show that the price you came up with is low to the standards of the market? Should you hike up the price? What if the price you came up with is more than your competition charges?

2.    What Is Your Objective?

When pricing your product or service you must always have an objective in mind, in other words, what you want to achieve.  Some objectives can be seen below.  Knowing your objective will have a huge impact on the final price you set.  It is true that the ultimate objective of your price is to make the most money possible.  However, there are different routes to reach that objective.

For example, the following are six pricing strategies to meet certain objectives.  Each strategy will, perhaps, result in a radically different price to meet the objectives of the business.

Strategy 1 -
Pricing low to penetrate the market and gain customers.

Objective –
Imagine you are just entering the market with a new product and you want to gain as many customers as possible. 

When to Use –
If you have a big “initial” product that you plan to sell and then follow it up with a higher priced “front-end” product.  Or it might be that you have a consumable product that people will buy over and over again so you want to gain customers, get them hooked on your product or service, and then slowly raise the price.

Beware of your competitors who already have a market position and see you as a threat. They may reduce their price to compete with yours or even lower than yours.  How long can you compete with them before you run out of money?

There is the story of the guy who sold brushes for €10. Lets call him guy A.  A new competitor (lets call him guy B) appears and starts selling his brushes at €8.  Guy A reduces his price to €7.  Guy B reduces his to €6.  Guy A reduces his to €5.  Guy B reduces his to €4.  This is way below the cost price and guy B eventually calls in to guy A and asks him how he can sell them at such a low price.  He told him that when guy B reduced his price to €6, he started buying from him and he didn’t know it.

Strategy 2 -
Pricing high to skim maximum profits.

Objective –
To gain the maximum amount of profit per unit in the shortest amount of time.

When to Use –
When your product is unique and new with no competition and you have a short window to skim the maximum profits before knock-offs start flooding the market. 
Be careful here, don’t assume you don’t have any competition.  Very, very and another very few businesses don’t have competition.

Strategy 3 -
Pricing low to crush the competition.

Objective –
You want to squeeze your competition out of the marketplace so they no longer compete with you.

When to Use –
Your product is a perceived commodity and you have one or two competitors with which you are constantly having price battles.  (How legal is this practice?)

When supermarkets began to appear in Ireland around the 1960’s, small shops (like my parent’s shop) got very worried. They couldn’t buy at the low prices of the supermarkets and that left them uncompetitive.  Gradually all the family grocers disappeared or else changed their modus operandii.  Also, over the years, many supermarket chains disappeared also, i.e. Crazy Prices, H Williams, L&N, Quinnsworth, Roches Stores, VG, 3 Guys, A&O and Five Star Supermarket.

Strategy 4 -
Pricing to make a “normal” profit.

Objective –
To set a price that is seen by your customer as honest and reasonable.

When to Use –
You may be on contract (such as a multi-national company or government contract) with a customer that you have a long-term relationship with and whose trust you value immensely (and who does periodic audits on your books).  In this case you might use a cost-plus pricing strategy.

Beware here that you don’t allow this customer to be greater than, say, 30% of your turnover, because if they drop you, you may end up closing.  Dunnes Stores, under the leadership of Ben Dunne, was renowned for this practice.

Strategy 5 -
Pricing to the market to be competitive.

Objective –
When you want to stay competitive and be considered for any tender, proposal, bidding, auction or other competitive pricing situations.

When to Use –
When your product is very similar to your competitor’s and you are limited in the methods you can use to differentiate it.

In 1985, when Ryanair started, seats on flights were huge prices. In 1986, they got permission from the regulatory authorities to operate between Dublin and London. Aer Lingus and BA prices at this stage were £209. Ryanair were £99 and lower.  In 1985, Ryanair carried 5,000 passengers on one small turbo prop plane.  In 2012, they carried 79,325,820 passengers. By 2019, they plan to reach 110 million. This week on 19th June 2012, they announced that they placed a contract for 175 Boeing 737-800 jets for $15.6 billion and were considering buying another 200 Boeing 737 Max’s.  The rest, as they say, is history.

Strategy 6 -
Pricing for maximum profit and maximum sales.

Objective –
You want to get the maximum amount of profit possible but not at the expense of losing customers.

When to Use –
After your initial introduction and you have the ability to differentiate your product.

When you review these six strategies you will realise that your price is not just taking the cost price and adding something on to cover overheads and profit. It is not just a function of the costing to produce your product or deliver your service but is more a function of what you’re trying to achieve.  It is strategic.

Go to part 2 now.