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Contributed by Go-To-Market, Inc. (www.gotomarketstrategies.com), an online resource center dedicated to helping sales and marketing professionals integrate the magic of marketing with the science of sales.
Arriving at the right price that is both competitive in the market place, sustainable for your margins and supports the benefits & features of your product or service is difficult. You don't want to price too low and leave money on the table and/or not meet your revenue goals. You don't want to price too low and leave money on the table and/or not meet your revenue goals. You also don't want to price too high and price yourself right out of the market. And, let's not forget those pesty profit goals we must all consider.
While there is no magic wand you can wave to arrive at the best pricing model for you, our "3 plus 1 Analysis" process can act as a guideline for developing a strong strategy:
- What does your competition charge? The first place we recommend you start is at the competition. If you think you don't have competition, you will have a completely different set of problems. But for those of you who do, make a list of each competitor in your market and their pricing structure, being sure to include both the price itself AND how it is priced (product bundles, free add-ons, hourly vs. project, etc.). Also, note their position in the market (low-end, mid-range, high-end). Use these ranges as a starting point as you analyze the next variable—YOUR market position.
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How are you positioned in the market? In this step, you must evaluate your position in the market. Are you a low-end, mid-range, or high-end option? Be honest with your positioning here. Don't try to position yourself as high-end, with high-end pricing, if you can't compete against your high-end competitors. On the flip side, you don't want to position yourself as the best in the market and not have your cost reflect that position. And, if you are truly a low-cost option, don't be ashamed of it and try to position yourself as something you're not. Nobody wins.
We also encourage you to consider surveying your market for validation of what the market actually would bear for a product or service like yours. Our clients are often surprised at what their prospects will pay, given the right set of features and benefits.
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What are your Revenue and Profit Goals? This third step of the analysis involves dividing your revenue target by the projected unit price you're considering. Then analyze whether the number of "units" you'd have to sell at that price to reach this revenue goal is reasonable for your market and position. It also involves dividing your total cost of doing business (development/production, administration, sales and marketing, etc.) by the projected number of units to be sold to determine how much "expense" per product you would be realizing at that level of revenue. Then measure that cost against your profit goals. It may sound elementary, but we never cease to be amazed at how many companies have priced their products in such a way that there is no possible chance of meeting their revenue or profit goals. If you find this to be the case when you run this analysis, you must look closely at your business. Can you cut costs? Expand your market potential? Adjust your revenue expectations?
Plus 1: Finally, what are the channels you plan to sell through? One final factor you should look at is mitigating channel conflict within your pricing model. Channel conflict occurs when one method for selling product or services, such as the web, catalog, or 3rd parties, threatens to cannibalize one or more existing selling channels for the same products or services, such as retail, wholesalers, resellers, or a direct sales team. To avoid the possibility of channel conflict, align your pricing strategy with all of the channels you plan to sell through.
As we said earlier, pricing a product or service can be difficult. And, considering only one of these variables by itself will not get you on the right track. Conducting this "3 plus 1 Analysis," gives you the best chance of being sure The Price is Right!
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