Pricing a product or service “right” is among the most difficult decisions that any company makes. Pricing is a choice, and one that carries enormous ramifications. The “right” price is highly subjective but essential to achieve your business goals. Here’s why:

Is the price right?

Your pricing strategy should support your overall business objectives. What’s your business strategy? Price must align with your business objectives. For example, most people know that Amazon pursued a “land grab” strategy by growing its customer base early on at the expense of profit, and priced their products to fulfill that objective. Consider your own strategy and price accordingly.

Price is a HUGE differentiator. And sometimes the only differentiator. Many times the only major difference between products is its price. Last time I shopped for a tennis racquet, the store offered hundreds to choose from. They were lined up in price order, least expensive on the left, most expensive on the right. I noticed the expensive ones tended to have larger racquet heads. When I asked the difference, the sales person said that once you get about to about $150, there is little difference other than racquet head size and price. He said older people generally want a larger head size, and have more money to spend, so those racquets cost many multiples more. And guess what? They buy them.

Photo: OTA

Price defines your brand. What do you think about when you think Hyundai? And what you think about when you think Audi? Much of what defines a luxury brands is it’s high price sticker.

Price defines your customer. What kind of customer do you want? Your price will define the kind of customer you will attract, so proceed with an understanding of the ramifications.

Price will alter your business operations. A value (inexpensive) provider operationally needs to be structured to handle a higher volume business. That can be very challenging. A luxury provider has be alluring enough to attract those willing to spend the money to purchase an exclusive product or service. Generally that means less customers overall.

Price will affect the way you market and sell your product. An item that costs $4.95 has to be marketed very differently than one that costs $499.95 or $4,995. Let’s say your business model allows for an expenditure of 20% on average for marketing against the sale of an individual product. So for an item that costs $4.95, your marketing spend is $1; for an item that costs $499.95, it’s $100. The more expensive the item, the more flexibility you have with how you can market it.

Understand how price sensitive your market really is. For some product and services, price sensitivity is incredibly high. The more commoditized your product is, or the more generic it seems to your marketplace, the more sensitivity there will be. Uniqueness has value, and therefore is less sensitive. Other market conditions – such as doing business with highly funded markets – typically lends itself to less price sensitivities.

So to sum up, don’t slap a price on your product and see what happens. Businesses generally think a long, hard time about what the right name is for their business. That’s good, because the right name is a fundamental marketing tool. So is pricing. Think long and hard about it too.

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